New Delhi: Managing director general of the Asian Development Bank (ADB) Rajat M. Nag says that India can return to expanding its economy by 9% a year in the next two-three years. However, Nag said in an interview that to sustain this growth, the country needs to improve goverance and infrastructure. Edited excerpts:
How sustainable is the recovery in Asia? Can there be any nasty surprises?
The risks are primarily two. First is the growth in the rest of the world. Asia still depends (on exports) for its GDP (gross domestic product). It exports almost 60% (of its) output to the US, the eurozone and Japan. So, obviously, what happens in the rest of the world will affect what happens in Asia. So if growth in the industrial world starts to falter, Asia will be affected.
Exit strategy: Asian Development Bank’s managing director general Rajat M. Nag says neither a fiscal nor a monetary stimulus should be permanent by definition, but it is important not to prematurely withdraw them. Rajkumar / Mint
Secondly, if there is premature withdrawal of fiscal and monetary stimulus, the growth could be jeopardized. I would say yes, there is certainly downside risks, but they are manageable. In that sense, I think growth is sustainable, but it is important to recognize that the growth dynamics is fragile.
Are we in for nasty surprises? Well, not something that I can foresee. Energy prices, for example, for whatever reasons, may move up very rapidly. That will obviously have an effect. Geo-political issues (could) also come in. But those are unlikely.
Recovery in India is going to follow similar pattern. The economic growth this fiscal, we expect 6% and 7% in 2010. Inflation is something to watch. Food prices have increased very rapidly, reflecting the poor monsoon. I think it is still important to keep close watch on inflation, not choke growth. Therefore, the authorities’ reactions and responses are appropriate, including the Reserve Bank of India.
What are the key lessons Asia has learnt from the downturn?
I think a key lesson that Asia has learnt from the crisis is that we need to be a consumer as well as a producer. We cannot constantly and consistently export our way out of economic difficulties. Exports are obviously important. Asia is part of the globalized world. But Asia needs to see itself as a consumer, as a destination for final production. As I said earlier, 60% of its production is exported. Even when there is an increase in intra-Asia trade, a large part of it is really intermediate products, the final product still goes out to the US or Europe. I think what we need to do is rebalance growth, which basically means to think of ourselves as consumers as well as producers.
Two, savings are very important, (but) sometimes can be too high. Therefore, there has to be some way of reducing savings and increasing consumption, which means we have to look at better social protection networks, better social insurance systems, better health provisions and better education provisions by the public sector. Because people save to protect themselves when they are old or ill or for their children’s education. So Asia has learnt that we need to have a more balanced growth.
Third, we need to have a deeper financial market, to have greater depth in the financial market in the region itself so that regional savings could be mobilized for regional investments. Therefore, growth of the regional bond and capital markets is very important.
Some are of the view that an asset bubble may be building up in Asia, especially in China. What is your view?
As I said, we need to keep a close watch. I don’t think at this moment we are seeing the possibility of formation of an asset price bubble, including in China. But because in China, due to this huge increase in liquidity in the banking system, and, therefore, very increased lending that has taken place, it is important to see that this lending is to the productive sectors and not just into real estate or equity markets. Authorities have already taken steps in that direction.
How soon do you think India can return to 9% growth?
As I said, we are projecting 7% growth in 2010. My feeling is in about two-three years, India should be able to get back to 9% growth rate. Fortunately, India is not as dependent on exports as say China is. India is, therefore, in that sense less vulnerable.
Some analysts feel the 9-10% growth rate that India wants to achieve is not sustainable. What is your view?
There are obviously challenges. It is not a binary situation—yes or no. India does face several fairly serious challenges. The government is very aware of those situations. One, growth, to be sustainable has to be inclusive. You cannot have growth taking place, which benefits only a small percentage with the rest left behind.
Two, the infrastructure deficit in India is huge. Yes, the government has talked about increasing the investment in infrastructure to 9% of GDP, which I think is very appropriate. But it is one thing to say you will increase and another thing to actually do it. Even if the outlays are there, which is the third challenge, which is implementation, you have to address the governance deficit. Governance deficit covers implementation, institutional weaknesses, reforms in bureaucratic processes, and corruption.
The fourth challenge comes from environment. I think India’s growth has to be environmentally sensitive and environment-friendly. And the fifth is regional cooperation and regional stability.
India cannot be an island of itself. India needs to and can, I believe, lead the region in enhancing mutual prosperity and, therefore, political stability. If these challenges are met, I think, the 9%-plus growth target is feasible. We are very optimistic. We think this is doable. India in one generation can become an affluent society. But it is not preordained.
You spoke about environment-friendly growth. What role do you think India and China should play in the climate change debate?
I think Asia, particularly India and China, need to play a major role in this debate. Because both are the fastest growing economies in the world. In 30 years from now, China will be the largest economy and India will be the second largest economy in the world.
Also, because of the huge poverty in India—the poor are the most vulnerable to environmental damage. Therefore, India has a stake in it because it will be affected. I think it is at the same time important to keep making the point that many of the environmental issues the world is facing now is a cumulative development process that has taken place in the past century or two, in which the developed countries have benefited.
So we now have a major dilemma. On the one hand, we have got only one planet. So we can’t say I didn’t cause it so I am not responsible for it. I think India and China will be very responsible global citizens. At the same time, it is understandable that India and China would say, “Look, on a per capita basis, our emission is very low compared with the industrialized world.” Therefore, (they will push for) some sort of fair sharing of burden, not exclusive but fair, in which the Western economies agree to provide financing clean energy technology and basically take responsibility for greenhouse emissions, which have been caused by the development forces from which they have benefited much more.
So, it is a very complex process in which the developed countries need to be very empathetic with the aspirations of the developing world, including India. But India has to play a very responsible role, but it will take time.
There is talk about an exit strategy in India on the fiscal and monetary stimulus that the government provided. How soon you think India should unwind its stimulus packages?
It is sensible that India and all other countries are thinking about an exit strategy. I think neither a fiscal stimulus nor a monetary stimulus should be permanent by definition. But the important thing is not to prematurely withdraw it. The government is right about thinking the options. When will it come off, that is a matter of judgement that the government has to make.
On the one hand, you do not want to choke growth. On the other hand, you do not want to fuel inflation. That is a very difficult balancing act. At the moment, the preference should be towards growth, that growth is not choked. In next year or two, I think it is important to see that the fiscal stimulus is withdrawn, but in a coordinated way among countries.
India has estimated that it requires $500 billion of investment in infrastructure in the next five years. What is your sense of the way this government has drawn up of doing it?
My feeling is out of the $500 billion (Rs23 trillion), a large part has to come from the private sector. Money is there, not only domestically, but internationally. But how much of that will happen will depend on the various issues that I have outlined, including governance. China is investing $200 billion in railways alone this year. So infrastructure deficit is so huge in India that even $500 billion is not enough. But I do expect the realization figures to be closer to the target if not more.
ADB is also into private lending. Do you plan to scale that up?
We certainly would like to scale it up as the demand is huge. But we have our own capital limitations in spite of the tripling of the capital that we got. But more importantly, we want to catalyze financing. (It’s) not just what we bring to the table, but we would like other private sector players to come in.
There are proposals for an Asian Monetary Fund and an Asian Union in line with the International Monetary Fund and the European Union. How feasible are these ideas?
What we are talking about is greater regional cooperation as well as regional integration; (it) is good for everybody. It’s a win-win situation, be it financial matters, be it in monetary matters or in trade and investment. I think the idea of an Asian Union like a European Union is several decades away. But the beginning has to be made through greater physical connectivity, and, therefore, that will lead to trade and investment flow. The countries should start talking, particularly in East Asia, about greater currency management, rather than talking about an Asian Monetary Fund. That does not mean we are talking about an Asian currency right away. But this is all part of a very long-drawn process. That is a very appropriate direction for the continent. But it will not happen overnight. We have a long distance to go.
It was believed that with the economic crisis, the centre of financial power will shift to Asia. Do you think Asian countries have done enough to reform their financial institutions to take advantage of the situation?
Asian countries have reformed their financial systems, not only recently due to the recent financial crisis, but since the (East) Asian financial crisis in 1997. This is why you see the Asian financial system to have been much less affected by this crisis. The Asian capital adequacy is much higher, well capitalized. The non-performing loans is less than 5% in Asia.
However, the financial sector in Asia is predominantly the banking sector. What needs to happen is the development of regional financial, capital and bond markets, particularly on the longer term, so that you can have better financing for infrastructure.
There needs to be much more deepening and broadening of financial sectors in Asia. And we are not there yet. At the moment, the financial centre of gravity is still in London or New York. But the economic centre of gravity is shifting towards Asia and I am sure the financial centre of gravity will shift as well.