Is India a bigger investment risk than China?
Stephen Roach thinks so:
Yet fears of hard landings for both economies are overblown, especially regarding China. Yes, China is paying a price for aggressive economic stimulus undertaken in the depths of the subprime crisis. The banking system funded the bulk of the additional spending, and thus is exposed to any deterioration in credit quality that may have arisen from such efforts. There are also concerns about frothy property markets and mounting inflation.While none of these problems should be minimized, they are unlikely to trigger a hard landing. Long fixated on stability, Chinese policymakers have been quick to take preemptive action....
India is more problematic. As the only economy in Asia with a current-account deficit, its external funding problems can hardly be taken lightly. Like China, Indiaâ??s economic-growth momentum is ebbing. But unlike China, the downshift is more pronounced â?? GDP growth fell through the 7% threshold in the third calendar-year quarter of 2011, and annual industrial output actually fell by 5.1% in October.
But the real problem is that, in contrast to China, Indian authorities have far less policy leeway. For starters, the rupee is in near free-fall. That means that the Reserve Bank of India â?? which has hiked its benchmark policy rate 13 times since the start of 2010 to deal with a still-serious inflation problem â?? can ill afford to ease monetary policy. Moreover, an outsize consolidated government budget deficit of around 9% of GDP limits Indiaâ??s fiscal-policy discretion.
