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India best placed among EMs on reforms push: El-Erian, Allianz SE

"India is most attractive among emerging economies beacause it is finally unleashing its economic potential and the growth rates of the recent past have confirmed that India has enormous potential."

, ET Bureau|
Updated: Nov 15, 2016, 09.05 AM IST
Mohamed El-Erian, chief economic adviser, Allianz SE, spoke to Sanam Mirchandani about the impact of Donald Trump's victory, in a phone interview. Edited excerpts.

Markets briefly rebounded after Trump's election. Will there be stability going forward?

The rebound came because of two things, both of which signal expectation of higher growth and higher inflation. The first element that has driven that is the content of what has come out from Trump since his election, in particular his emphasis on infrastructure, deregulation and corporate tax reforms and his lack of emphasis on protectionism. The second driver has been the tone of his comments. In particular, they have been very conciliatory.

Trump spoke of rebuilding US infrastructure. What does this mean for the global economy?

It is unambiguously positive for the global economy because it would promote economic growth in the US. The US economy remains an important locomotive of global growth.

Do you expect US Federal Reserve to raise interest rates?

In the immediate aftermath of the Trump win, markets have markedly reduced the probability of a December rate hike. But as the spot markets gain momentum, they are now having a second look. A rate hike in December remains probable. It is more likely than it is unlikely. Rate hikes are going to be very gradual, it is going to be a very shallow path. There is going to be stop-go characteristic -one hike, then a pause, then another hike. Thirdly, the terminal point will be much lower than the past.

Is there a fear that Trump may try to curb the Fed's independence?

One of the consequences of this antiestablishment movement that is taking hold on both sides of the Atlantic is to question the autonomy and policies of central banks and it is not just done by anti-establishment politicians. UK Prime Minister Theresa May recently questioned the policies of the Bank of England. It is important for the people to realise that it is part of a much bigger phenomenon of what happens when advanced economies operate at low economic growth for long term and when the benefits of that low economic growth go to a very small segment of the population. When that happens, as it has already happened, you get a lot of political, economic, institutional and financial pressures and one of the institutional pressures is to question the independence of central banks.

What does the rise of protectionist policy makers mean for the world?

It is an important reminder of what happens when growth is inadequate.It is a challenge because the anti-globalisation sentiment is becoming more prevalent in more countries and it emphasises the need for individual countries to ensure that their own engines of growth are energised.

You have been saying world economy is at the end of the easy monetary policy era. Are we likely to see that soon?

It is very hard to identify the timing of inflection points. They can be triggered by the smallest thing. What we are seeing is the growing ineffectiveness of central banks and that reflects two things. In one case they are less able to deliver good results. In other cases like the Fed they are less willing to continue to experiment with the monetary policy. Whether it is a question of ability or whether it is a question of willingness, I suspect that central banks would be less effective in the period ahead.

What will be the impact of Trump's win on emerging market equities and currencies?

If he pursues an anti-globalisation agenda, then that will mean a headwind for emerging markets (EMs) and translate into lower growth and weaker currencies and higher inflation. If he does not pursue protectionism and focuses on other elements of his economic programme, it would mean a tailwind for EMs with higher growth and more stable currencies.

How do you place India on the emerging markets scene?

India is the most attractive among emerging economies because of the perception that the country is finally unleashing its enormous economic potential and the growth rates of the recent past have confirmed that India has enormous potential. What a lot of investors are looking for is continued implementation of structural reforms that improve the country's productivity and allow it to continue to climb up the value-added curve. India is central on foreign investors radar screen but they are also very focused on the continued implementation of Prime Minister Modi's structural reforms.

Is India expensive as a market?

One has to remember that because of the role of the money that is pushed into emerging markets, valuations tend to overshoot both on the way up and on the way down. That reflects the much more volatile external component of the flows. It is what I call tourist dollars as opposed to local dollars and they are the first to flee anything that goes up. One has to be careful about the timing of the investments. We are now in a period where after having underperformed other markets, the emerging world has been outperforming other markets and here I would be more tactical and strategic. India is a very strong, longer-term case. One also has to be more tactical than in the past.

India has made a surprise move to scrap notes of higher denomination, which it is feared will crimp consumption. What is your prognosis?

The argument of why high-denomination bank notes tend to encourage all sorts of illicit activities and also tend to slow the integration of the parallel economy into the formal economy. There is a global shift towards reducing the high-denomination notes. We have seen this happen in Europe. We are moving slowly to a cashless society. What I find of particular interest in India is how it was done. It was done very rapidly but the how part of it is something that I am learning more about because that it going to be very important in determining the economic effects of this policy action. I can see the argu ment for short-term pain and longterm gain because this is part of a global phenomenon. But I'm not close enough to tell the extent of the pain.

Your outlook for the dollar?

That is the hardest thing to predict because it is a relative price. It doesn't only depend on what the US is doing but it also depends on what other countries are doing. It is also a market that is the most flexible. The bond market is still being influenced by central banks in an abnormal fashion so the currency market tends to have to carry the whole burden of the adjustments. In a perfect world, the world in which global rebalances occur in an orderly fashion, you would want the dollar to rise on the back of two things -higher growth in the US and the normalisation of monetary policy. A good global rebalancing would be consistent with a healthy rise in the dollar.The fear that most of us have is that we get an unhealthy rise in the dollar.That unhealthy rise for example could come from protectionism, because US being a more closed economy than others would still suffer in absolute terms but it will suffer less. The hope is for a global rebalancing and part of the global rebalancing would be a healthy appreciation of the US dollar.

What does Trump's win mean for the technology sector which he says has resulted in loss of jobs in the US?

The major challenge that is going to face this industry goes well beyond what Mr Trump's policies will be. This segment is facing another wave of technological disruption, fuelled by a very quickly evolving combination of artificial intelligence and big data. It is critical for India to keep up with these developments. They are happening very fast on the ground and it is going to redefine this industry and India should maintain what has been a very important position in this global industry.

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