India's crisis a 'wake-up call': Stephen Roach

Roach: Are India optimists a dying breed?

Long-term India bull Stephen Roach told CNBC on Tuesday that he was turning bearish on Asia's third-largest economy, and warned that the country's currency crisis should prove a "wake-up call" for investors.

"I've been a big fan and very optimistic on India for a number of years but I'm really having serious second thoughts right now," said Roach.

India's beleaguered economy has been in the spotlight in recent months, amid a dramatic decline in the rupee, which has fallen nearly 19 percent against the dollar this year.

(Read more: Foreign investors ignore panic gripping India)

Recent losses have been triggered by speculation over when the Federal Reserve will taper its flow of easy money, which has hit countries with large current account deficits particularly hard. However, India already has some long-term structural issues that investors are losing patience with.

Roach, who is senior fellow at Yale University, said he has grown frustrated with the Indian government's seeming inability to push through much-needed structural reforms, tackle its burgeoning budget deficit and fully open up its market to foreign direct investment, problems that have long put off international investors.

Indranil Mukherjee | AFP | Getty Images

"This government [India's] has done very little in the way of meaningful economic reforms... it's still a rigid, bureaucratic society with inadequate infrastructure, insufficient savings and I think this crisis is a real wake up call for India optimists like myself," he added.

Roach said it was possible that weakness in India's economy, where growth has almost halved to less than 5 percent in the past six years, could lead the country into a recession.

"It's definitely possible [a recession in India]. I hope that's not the case and it's not my forecast, but I wouldn't rule it out with a plunging currency creating the need for monetary tightening that would take a toll on the real economy," he added.

(Read more: RBI's Rajan takes a deep dive to save the rupee)

The economist added that he was doubtful on how quickly Indian policy makers would move to address these issues given their track record.

"India is long on excuses and short on action. The current administration of India is really an embarrassment to a nation that was so promising," he said.

On Asia "Squawk Box" on Tuesday Roach reiterated his view that the recent fallout in emerging markets has the potential to spread to other global economies.

"I certainly worry that there is a crisis that might spread and that would be a most disturbing development. [It would be] the second post crisis disaster for the world following the European debt crisis," he said.

Roach said this scenario would be the result of the U.S. central bank's asset purchasing programs coupled with the inability of developing economies, namely India and Indonesia, to address structural issues.

(Read more: India swamped by a wave of growth downgrades)

"QE2, QE3 [quantitative easing] and Operation Twist have done nothing except inject excess liquidity into financial assets and now we are seeing the downside of that misadventure," said Roach.

"But I don't want to just blame the Fed. The developing economies...especially India and Indonesia should have been hard at work dealing their structural problems, but they were asleep at the switch and now they are paying the price for it," he added.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie