Lawrence H. Summers is member of the Eminent Persons Panel seeking to make the Asian Development Bank relevant to the emerging Asia scenario
In an address to the Reserve Bank of India last year, Summers, who was US treasury secretary from 1999-2001 under Bill Clinton, advocated that India put its foreign currency reserves to better use, especially by investing in infrastructure.
Summers is a Charles W. Eliot professor of Harvard University, of which he was the president till last year.
In New Delhi recently to deliver a lecture on global warming and global finance, Summers spoke to Mint.
The Eminent Persons Report says that ADB should adapt itself to the new realities of an emerging Asia that is battling with problems associated with high growth, compared with development issues 20 years ago. Could you elaborate?
The crucial part of the challenge now in Asia will be to manage growth in an effective way. The growth rates that have been sustained for the last several years in India, and for quite some time now in China, would have been thought inconceivable some time ago.
At the same time, the flows of capital and accumulation of reserves are things that no one could have imagined too. These provide a very different framework, a different set of challenges, but are, frankly, a better set of challenges than what they faced sometime ago.
Do you think that in this area, India’s policymakers are facing the problem of the impossible trinity? What is the way out, other than letting the rupee appreciate?
It is much better to live in a country that capital is trying to flow into, than one that capital is trying to get out of in a hurry. It is far preferable to have capital inflow problems than outflow problems. There’s no question that the situation does call to mind the impossible trinity.
Over time, as India integrates with the global economy, the strategy of trying to manage exchange rate and monetary policy independently by interfering with capital mobility will become less and less viable.
Regardless of precisely what decisions can be made on capital account convertibility, those tensions are surely going to increase in the future. Another way to put the same problem is that the efficacy of sterilized intervention is likely to diminish eventually.
So, the use of intervention as a tool to manage the exchange rate is going to become more problematic and India will have to make a decision as to whether to accept more exchange rate volatility or whether to accept less ability to tie monetary policy to domestic conditions.
My guess is that a large country like India that finds itself without a natural single alternative and anchor, is likely to, over time, begin accepting more exchange rate volatility and developing more sophisticated financial market tools to enable producers, businesses and consumers to hedge developments in the exchange market. This will be an important part in the maturing of the Indian economy.
India has recently unveiled plans to use its reserves for infrastructure. Do you think it’s viable?
I am not familiar with all the aspects of this plan or the context. I’m struck that India’s reserves increased by some $50 billion (Rs2,10,000 crore) since I spoke about this issue a year ago at RBI.
There have been important steps in this direction in a number of countries like China and Korea. How to use reserves for maximum efficacy is a question that will loom large for India.
Just what the right combination of measures will be—of increased interest rate flexibility, reduced reserve accumulation, investment of reserves in external assets and methods found to channel reserve investment into infrastructure—remains to be seen.
Do you see a definite economic slowdown in the US? How will it affect emerging Asia?
The balance of risks for the US economy has shifted towards reduced growth. The combination of the facts that the expansion has run for a considerable length now, greater pressure in business investment, difficulties in the housing market and housing finance sector—all increase the likelihood that growth will slow and raise the risk of recession.
I would not at this point be prepared to predict a recession but I wouldn’t feel completely confident that one would be avoided..
It’s hard to know what the impact of the US slowdown will be. If there’s a slowdown it will be associated with a decline in the value of the dollar. So, you will have less domain coming from the US and you’d also have expenditure switching towards the US if the dollar declines.
If the slowdown were to be substantial, it would be a mistake to assume that the rest of the world could proceed without meaningful impact. No doubt the US is less a single driver of the global economy than it was several years ago, but a slowdown would still be of considerable concern.
Specifically, how will the slowdown and a falling dollar affect China and India?
The US is the importer of last resort in the world economy. So, if the US reduces its imports, it would obviously affect exporters.
One of India’s virtues relative to China is that it is somewhat less integrated into the global economy in the total capital flow sense and in a trade sense. So, it is somewhat less subject to inflows.
On the other hand, it also means that India has more to gain from increased integration and I would worry a little bit that in a declining US economy, the protectionist pressures would increase and in general the integration pressures on the global economy would decline.
A falling dollar would also impact the profitability of the MNCs, their imports and their investment propensity. It is in everybody’s interest that the US finds its way through and we see as pause to refresh us rather than a meaningful economic slowdown.
How sustainable is India’s growth story?
I’ve been following the Indian economy closely for two decades now. Without minimizing the problems, this has to be a moment of great optimism. There’s a very clear sense of tremendous economic energy, which comes from the liberalization that has taken place and very remarkable things that the private sector has been able to do in sectors like telecom.
The question is, how long can it sustain itself without a further impetus from liberalization?
Three areas that look absolutely critical to me are— financial services, where there is an inefficient financial system because of an excessive solicitude by international standards for state banks; the agriculture sector where significant reforms are necessary if productivity as measured in crops grown per hectare is to approach the Chinese levels; and in infrastructure where the economy has clearly lagged behind and the lag has been greatest in the areas of public control.
Do you think that in many sectors such as retail, banking or agriculture, which are of interest to US companies, there is a lack of policy direction in India?
There are real questions here despite the enormous progress made. India for too long has operated on a system of a presumption of prohibition rather than a presumption of permission.
Every time there’s a move to a presumption of permission where businesses can just move ahead, there’s a tendency to put things back.
I would also hope that in terms of the potential to sustain very rapid growth in the next decade, India does not lose sight of other issues that would ultimately determine its success.
In this respect, the issues of including everyone in growth where the public education and health systems has not been delivering the way it should and the questions of finding a way forward in environment are important in terms of a proven framework that mitigates risks.