Deutsche Bank bullish on India growth story

New Delhi, Aug 3: Deutsche Bank Chief Economist Nobert Walter says India is a ''growth star'' of the future with potential unbound and projects a growth rate of eight per cent for the economy for 2007 and the next fiscal.

''India is looking good. It's growth story is set to continue,'' Prof Walter told a meeting of German and Indian CEOs here.

Prof Walter said India's fiscal consolidation was well underway and inflationary pressure expected to subside. Besides, the public debt was narrowing and its external debt dwindling. Another favourable indicator relating to the external position is its soaring foreign exchange reserves.

The German economist was making a presentation titled ''World Economic Cycle Mature Financial Markets Nervous?'' under the auspices of Deutsche Bank Research, a think tank of the Deutsche Bank Group.

The presentation related to the survey of the global economy where India figured prominently.

Prof Walter, however, pointed to two features which are a downslide to the India growth story. The first related to the poor state of physical infrastructure and the second the continuing hassle factor, that is, bureaucratic delays acting as bottlenecks to investments - both Indian and foreign.

He said the Indian reform process has been encouraging and noted that India has turned in a sparkling growth of six per cent in the past 12 years.

Prof Walter said India was increasingly attracting the world interest as a result of the country's impressive economic performance resulting from unleashing of the liberalisation process as well as its attempts to integrate with the global economy.

The noted economist was of the view that the Centre needs to trigger competition among the State Governments for carrying out further liberalisation and reforms. Besides, the State Governments need to be incentivised to make their economies more competitive.

The event was organised by the Indo-German Chamber of Commerce (IGCC) and its Deputy Director-General Ajay Singha made out a case for foreign corporates to increase their investment as the inefficient companies have been compelled to wind up their operations.

Prof Walter felt that India was a more sustainable development model than China and hinted that the Dragon may be in for some trouble due to structural problems. In fact, Prof Walter gave the clear impression that India in the Western eyes was a more admirable model than China and its growth potential far greater than the neighbouring country.

The Deutsche Bank analysis shows that there is a positive business climate in the Euroland, United States and Japan.

It notes that the global economy is in the fifth year of robust growth, though there has been a slight decrease in the economic activities of the G-7 countries.

While Asia-10 remains very strong with GDP growth of eight per cent last year and a seven per cent growth in the current year, U S economy is experiencing a slow down. The primary reason for decline in the growth of American economy is the threat of a bubble burst relating to the housing sector.

The European Union was experiencing strong domestic demand with high oil and resource exports.

Prof Walter said both the United States and Europe have reacted by taking recourse to protectionist measures, which he felt were undesirable.

The economist was of the view that China will continue to experience high growth rate with the key drivers being high investments, efficient human capital, stable population growth and growing trade openness.

Prof Walter listed some risks to the global economy. The biggest risk emanates from a US housing crash, triggering recession. This would result in a sharp slow down of US consumption, a contagion impact on the world economy as also heightening of credit risks.

This could also result in a cycle of low interest rates and re-pricing of riskier assets.

The second biggest threat to the global economy could result from a disorderly foreign exchange adjustment by the G-7 countries. This would have a negative impact on exports, a drop in the US dollar and a sell-off of American assets.

The third factor in the downslide can result if the Iran stand-off escalates into a military conflict. In such a scenario, there could be a surge in oil prices on fear of supply shock, risks resulting from economic stagflation and sell-off in risk assets with investments flowing into safe havens like Government bonds.

The global economy is also threatened in the event of China's overheating ending in hard lending. This could happen in the year 2008-2009.

This impact of such a course would be a sharply lower growth and investment in China, a hefty decline in commodity prices especially metals and a deep schism in Asian commodity exports resulting from a demand slump.

The fifth risk is from persistent inflation triggering Fed hikes.

This could lead to a slump in interest sensitive spending as well as growth itself. If the US housing woes grow, this could result in credit and mortgage risks going up. It could also result in re-pricing of riskier assets, Prof Walter said.

UNI