New Delhi: Having served at World Bank, Citigroup and IMF, Stanley Fischer is now the governor of Bank of Israel. He spoke to TOI about the issues facing the global economy and India-Israel trade.
Q: How do you see the US situation panning out in the coming days and how is it going to affect your economy, our economy and China? A: It seems pretty clear that there is a significant growth slowdown in the US based largely on the rapid increase in unemployment rate. How deep will it (slowdown) be is difficult to tell at this stage. There are various estimates but growth will be slower than last year, and significantly so.
Because so many countries are exporters to the US, including us, including you, of course, including China, there will be an impact on exports. There’s been a lot of talk about the decoupling hypothesis but there is a sense in which we are already decoupled and in a sense we are not. Asia will continue to grow at rates, which are very high by the standards of the West but I don’t think Asia will grow in 2008 at rates it grew at in 2007.
Q: What are the forces at work here?
A: Basically it’s export growth. Whatever impact it will have on investment. Your growth is partly because of rapid increase in investment ratio and there could be an impact on that. But in the first round the impact will be on export and in later rounds, on other areas also. It’s very hard to tell how it will affect capital flows. There are only two views. One is it will go up and the other is it will go down. The go-up view is that US savings are bound to go up because consumption is going to go down a bit. The other is people will become more cautious and less interested in foreign investment. But I suspect the interest in growth poles of the world, BRIC, will continue, probably foreign investment component will not decline since it did not decline even during the Asian crisis to any significant extent.
Q: Should India move fast on capital account convertibility given that it managed to stay away from the Asian crisis in 1997 because it was largely cut off ?
A: It will not be a one shot event and it should not be a one shot event. We are now completely liberalized but the process took us 15 years. It should be a very long process but maybe you are trading off some growth for some less stability.
Q: What are other issues that are similar with India? A: We have very much this problem of exchange rate, capital inflows, and export interaction where when you open up to capital flows, if you are attractive, you may find yourself getting a lot of capital inflows. Then you are going to get an exchange rate appreciation. We have got that. Or you might get what you have got here which is large capital inflows, which to a large extent are being offset by intervention. Then you face a sterlization problem.
Q: One of the two institutions you have worked in is in the midst of a crisis and the other is always fighting crises. A: In the case of Citi, I leave it in the capable hands of Mr Vikram Pandit. Obviously, there is a set of lessons for the whole system. On IMF, the new managing director is very ambitious...he’s clearly about to downsize the Fund significantly to deal with the financial problems but more importantly he has to redefine or reaffirm the mission.
Q: What about India-Israel relations?
A: We think there are considerable possibilities to enhance trade. We have been discussing a free trade agreement. It’s a decision for India to take.