The former chief economic advisor, Ashok Kumar Lahiri, is taking charge as executive director, representing India, at the Asian Development Bank at a very interesting juncture: India is poised to join the select band of trillion dollar economies and, along with China, Japan and other South-East Asian countries, underscores Asia as the new growth centre of the world.
He will, therefore, be facing challenges of an entirely different kind as the country emerges as an important regional economic power. In a wide ranging interview with Mint, he spoke about challenges ahead. Edited excerpts:
You move to the Asian Development Bank in Manila under very different circumstances. It is a very different India and similarly a very different ADB. What is the perspective that you will take with you?
The first thing is that I genuinely believe that this century will be known as the Asian century. Let me give you some figures. In the first two millennia, up to 1820, Asia accounted for 68% of the world population and almost 60% of world output. Then something happened and Asia lost the race.
If you look at India, for example, it accounted for 16% of the world income up to 1820 and then the decline started. Now, Asia is once again catching up. Like China, India is a big country. The perspective, as I see, is that India has always had a very cooperative strategy with the rest of the world. The Prime Minister himself talked about the ‘Look East policy’.
Look at the rate of growth of inter-regional trade—our share of trade with the Asian region is increasing very fast. So, my perspective is that we will continue to be a very vibrant region and India will continue to play an increasingly important role.
When you are a very small country with a very small share of world GDP or trade, then the rest of the world is not that much bothered about you. India is already a trillion dollar economy, according to some people, and growing at 8-9% every year, you are actually making a lot of waves.
So, I go with a lot of confidence and I think people look to our country for responsible citizenship in the world committee of nations. What surprised me when I went to Singapore for the annual meetings of the International Monetary Fund and the World Bank was a seminar, which was discussing what India and China can do for the world.
My first reaction was that I was not used to such a question. Normally, we ask what the world can do for us? Now already it is being turned around.
Do you think then the time has come for India to stop borrowing from multilateral institutions?
I don’t think so. You will recall that most countries have active economies, they export the same commodity and import the same commodity. If you are an exporter of cars, it does not mean that you don’t import cars.
If you are an exporter of basmati rice, it does not mean that you will not be importing some rice. Similarly, you may be investing capital abroad, but you also encourage capital flows. The reason is that if you are following a market economy principle, then you may have found an investment opportunity in Brazil or Singapore and want to take your money out.
On the other hand, someone else may have found another investor who is willing to lend to his or her company and wants to borrow. So, I don’t think it is appropriate to say that we should stop borrowing. It is a matter of price. Further more, many of these loans don’t just come as money—there is technical expertise, implementation procedures and so on.
So, it is not just disembodied money that is coming in. So, it has to be case-by-case approach and so I wouldn’t go for a blanket ban.
What do you envisage for the multilateral institutions, given the raging global debate about their utility?
I think the multilateral institutions will continue to have their work cut out for them. In the 1970s, the United Kingdom took a loan from IMF. They graduated. You find that many of the East Asian countries, which had programmes, have graduated. India has come a long way from 1991.
There will be enough less developed economies that will require multilateral support for the war on poverty, hunger and development. They will also claim an important role in policy coordination. You need a club where countries can meet and thrash out policies.
Given India’s growing economic status, do you see it using this to its advantage to gain some regional leverage?
I think it will come automatically. Trade and investment are very important for inter-country relationships. Leveraging is a bad word. It will come automatically. Perhaps what you mean is that we have to learn to behave like a big country. We have to keep in mind that 1% of our GDP is a large amount, unlike a small country. So, if someone is asking half a percent of our market, you have to think what will you get in return. I suppose when the per capita income increases, your relationship with other countries too evolves.
How do you see this panning out vis-à-vis China? That is, as India automatically begins to assert itself in the region?
I don’t look upon it as a competition. China is our neighbour. We have a large growing trade relationship. It is a constructive competition. I go to ADB with a lot of humility. East Asia, particularly China, has done a lot of things very successfully. And, I want to learn as to what they are doing right. Apart from that, I don’t want to join the debate whether India will overtake China or not.
China is pretty adept in spreading their reach. They have now begun to use their soft power. Do you think India should emulate this strategy?
We are also slowly expanding. I don’t know much about what China is doing and hence will not be compare their approach with ours. You will notice that India has also stepped up; we have been always willing to do, our part in other countries.
We have got soft loans, lines of credit, interest subsidies. But one of the things that you have to keep in mind is that there are many more poor people in India than in some countries combined together.
So, if you have to think about what you are going to do for them, you have to think what you are going to do for your own people.
Right now there are several Asian economic blocks. Do you see the emergence of one cohesive zone?
Ultimately, if you look at the evolution of the European Union, some such mature economic relationship is bound to emerge in the years to come. The question is whether you take several decades or one decade I can’t say. But if you ask me a categorical question as to whether it will happen. Then the answer is yes.
What is the macro-economic outlook your successor here in India is going to inherit?
I believe that there is a lot of resilience in the Indian growth process right now. I say that because of the increase in the savings and investment rate. Mind you, nothing succeeds like success.
If you look at East Asia, for example, what you find is that there was a period when growth took off. So, when growth takes off you are earning more than what your father earned.
So, even if he was dissaving what he had saved and you are saving only 10% of your income, your savings are much more than his dissavings. So, when growth accelerates, savings rates goes up.
And most of the savings go to domestic investment. In turn when domestic investment goes up, it reinforces growth. And that is the virtuous circle.
What is absolutely delightful is the increase in the savings rate that we have seen. I expect that this upward trend in the savings and investment rate, and its feedback into growth, will continue. Gone are those gloomy days of foreign exchange crisis. Industrial restructuring that was started after internal and external liberalization seems to have taken root. Indian industry today is a very different kettle of fish. So, the macro economic fundamentals are basically very sound.
Does it mean that no challenges remain? That is not true. One is infrastructure. You have to resolve it without falling into the trap of busting the FRBM (Fiscal Responsibility and Budget Management Bill). And, you have to do it consistently. Because we know the fiscal deficit is neither a necessary or sufficient condition for infrastructure growth. We had plenty of fiscal deficit and we did not have infrastructure. East Asia has built its infrastructure without having a fiscal deficit.
Secondly, while inflation has been brought down successfully, vulnerabilities remain from three sources. One is oil prices; mind you they have crossed $70 and we seem to inure to this fact. Secondly, prices of edible oils, wheat, pulses and other essential commodities are under pressure. The world is growing at a fast rate and that creates pressure on these commodities. Thirdly, there is the question of the exchange rate. I am not talking about the rupee rate; instead what happens to the dollar vis-à-vis the yen and so on.
So overall we are much better off than we were earlier. But it has to be carefully steered.
The single biggest macro-economic problem is managing the surfeit of foreign capital inflows. On the face of it, the Reserve Bank of India seems to have run out of options. What do you think is the way out?
I don’t think RBI will agree with you that it has run out of options. They are doing a wonderful job managing the exchange rate and bringing the inflation rate down. So, I don’t agree with your conclusion. But, since you are asking as to what has to be done, the answers are obvious.
For one, you have (foreign currency) reserve growth when there are capital flows. This takes place to the extent that the current account deficit (on the balance of payments) is not able to neutralize the capital flows.
Mind you, the current account deficit has been about 1-1.5% of gross domestic product (GDP) and various committees have said that a prudent limit is 2.5-3% of GDP. And current account deficit is the difference between domestic investment and domestic savings.
So, if the investment boom continues, capital flows will be reflected in higher investments and a current account deficit. Secondly, the outward flows have shown that Indian entrepreneurs are going very vigorously to make global acquisitions and mergers.
So, as global chains are built up and Indian multinationals start flexing their muscles. That will be one part. And capital flows reflect some turmoil in the international currency alignments. So, when there is a durable solution, then I think this problem too will diminish.
Finally, you have been with the ministry of finance for a long stretch. In this period, how have you seen the institutional relationship, between finance ministry and RBI evolve? Often it has been acerbic.
I think it has been a very mature and evolving relationship. It has been very cordial and at the same time it is a vibrant democracy. And often people forget when the bureaucracy comes out with a united stand that there has been a vibrant debate inside. Describing it as acerbic is not right.