Dependence on foreign capital to fund external deficits is the biggest risk for India, Stephen Roach, chairman of Morgan Stanley Asia said here on Tuesday.

According to Roach, a tougher market climate is expected this year as investors come to grips with some of the more normal after-shocks of the financial crisis.

For Roach, the story for India is a very compelling one over the next several years. “Micros in terms of companies and labour force remain very positive. Macros in terms of savings and foreign direct investment in infrastructure have improved a lot in recent years,” Roach told reporters.

Roach, who has been bullish on India’s growth story for the past nine months, continues to be optimistic. According to him, because of the stable economy he would prefer India over China. However, he expressed concerns over India’s infrastructure constraints, saying they needed to be addressed immediately.

According to Roach, policymakers in India should be congratulated to have put a bottom to the deterioration last year. However, he said that is not enough. “I hope the Indian government is mindful of the resilient economy and this not the time to be focus on the exit policy. You don’t need to look at crisis management while letting inflation surge along with asset prices,” Roach said.

Roach expects the budget slated for February 26 to look into the area of fiscal consolidation. “I am hopeful that the government will target around 5.5 per cent of GDP by end of next financial year with 1.3 per cent reduction in fiscal deficit,” Roach said. According to him, this is the time for fiscal consolidation when the economy is strong.