Privatization is a good thing for EMs

Originally published on SmartInvestor.in, October 25, 2010.

John O'Donnell, Chief Knowledge Officer, Online Trading Academy talks to Krishna Merchant about the government disinvestment program, global currency war and world economy.

Question: Coal India has collected over Rs 2.4-lakh crore from its initial public offer. Do you see funding deficit via divesting stake in PSUs as a good thing?

Answer: Privatization is a good thing for emerging markets (EMs), if they use proceeds to reduce government deficit spending and lower taxes. I would like to see the government sell 30% equity to public in Coal India and not 10% that they have sold. The proceeds could be used to balance the budget and build infrastructure in India.

Funding the government deficit via divesting stake in public sector undertakings (PSUs) will be detrimental to the economy in the long-run if this capital is not reinvested or used to reduce country debt. Japan’s deficit has risen to almost 200% of GDP from 53% of GDP in 1989, and one can see how the economy has performed since 1989.

I would like emerging market governments to reduce deficits or find other means to fund them. In a perfect world all governments should live within their means and reduce taxes to allow private sector to grow faster with private capital.

Question: Finance ministers from the Group of 20 nations have gathered in South Korea to discus currency devaluation issue. What is your outlook?

Answer: Competitive devaluation of the currency is not a good thing and will lead to currency war, trade imbalances. However, the markets have the ability to keep a check and determine the right exchange rate.

Question: China had raised interest rates last week and the growth slowed to single digit to 9.6%. Do you see a slowdown in the world’s fastest growing economy?

Answer: I am bullish on China from a long-term perspective. In the short-term, however, we are seeing a bubble in the Chinese real estate market and the growth is slowing.

Question: Do you think quantitative easing will work towards boosting the flagging US economy?

Answer: I do not expect QE2 (Quantitative Easing Two) to bolster economic growth in the U.S. as 70% of the US economy depends on consumption.

The first round of monetary easing did not stimulate consumption as the printed greenback did not reach the streets, banks did not lend hence demand was subdued. I am not convinced that QE2 will work.

Question: Do you expect a double dip recession in the US?

Answer: The US has not been able to recover from the recession, and I expect the downturn to continue until 2012.

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