New Delhi: Onno Rühl, a Dutch national, took over as country director of the World Bank in India on 3 September even as the multilateral institution started working on its strategy for the country for the next four years (2013-16).
In an interview, Rühl emphasized the need for India to reduce its dependence on foreign capital and develop its own financial markets.
India should help small and medium enterprises (SMEs) have access to easier finance so they can create enough jobs for the country to realize its demographic dividend, he said. Rühl also ruled out tapering off funds for India though the nation has moved up the income ladder and is now categorised as a lower middle income country. Edited excerpts:
What is your assessment of the world economy at this point of time?
It is hard to disagree with the most common view that there is relatively little hope for strong recovery in developed markets, especially in the US and Europe. Things are a little bit okay, but not great. In Europe, issues are deep. Politicians are working on it, they are taking their time. Issues are really very difficult. It is hard to see growth picking up there.
Developing markets have significantly more potential; certainly, in the short term. The key thing is how developing countries can realize that they can grow by themselves; how they will develop strategies that are less dependent upon the developed markets. The dynamics of growth is not so much of an issue because of the market size of significant economies like China and India and Brazil. The key is on the financing side because the developed economies still play an important role in financing flows. A lot of work needs to be done there.
When you say a lot of work needs to be done, do you mean the economies need to do more to pull in the money or are you saying that the global financial architecture needs to be fixed?
I am not so sure if global financial architecture is the issue. The real issue is private flows and investment because that is where money is. Deepening domestic and regional capital markets, I think, is a really important agenda for many developing countries like India. The key is to get depth and sophistication in financial markets such as in India so that we maximise the potential, first and foremost, of domestic capital because it will always be bigger than foreign capital. And it flows in the same way; domestic investments also have alternatives, they react to same kind of incentives, they can put their money outside or inside the country. I think the key is that the full range of financial instruments are available.
Foreign investors have been looking for signals from the government in terms of growth. There is a big concern that we are not fixing the structural reforms that are needed in this country.
I think it is important to send signals to foreign investors that it is a good idea to invest in India.
My view would be—if you are a global player and you think about where you are going to put your money and have a 10-year horizon, it would be difficult to imagine a business strategy that did not involve putting money in India because it is already one of the great markets in the world and it will be even greater.
I hear relatively little (in India) about what I believe will drive growth, which is domestic investment by smaller and medium-size companies. These are the enterprises that create jobs across the world. Creating a sentiment that drives that kind of investment has much more growth potential than attracting foreign investors, no matter how important they are. I am not dismissing them, but more of the debate should be about the domestic investors and not necessarily the huge ones.
Though small enterprises generate the jobs, they are cash-strapped. One of the biggest problems in India is jobless growth.
I am glad you are bringing up the topic as the World Bank is just issuing its World Development Report on jobs. It is the key issue in the world today, especially in a country like India which has what we call a demographic dividend. The trick with demographic dividend is that you have to make sure that it remains a dividend and it does not become a burden in the form of unemployment.
Banks not lending to smaller enterprises is a bigger problem for jobs than foreign investors not investing in the country. I would always look at how banks are behaving and how can we make sure they behave better. You cannot and should not force bankers to take risks that they are uncomfortable taking, because that is a road to financial crisis, but you can create a conducive environment where the risk is better.
We also have to look at the role of agriculture—how increasing agriculture productivity will shift the job market in a constructive way. There is an enormous agenda out there. We would like to share our experience, which is a learning experience. There is not a politician in the world in any country who does not think jobs is his or her most important agenda. Nobody has the magic bullet solution. It will require a lot of shift and I hope this will shift the debate in India.
The World Bank’s country strategy is ending (2009-12) this year. Are you going to introduce any changes in the lending programme?
We are thinking about the country strategy and it is a great thing to do just coming in. We are brainstorming with the team.
The bank’s money for India is the biggest amount that we have for any country in the world, but a small amount relative to the economy and budget of the government.
Our money is not going to lift the tens of millions of SMEs, but our thinking will contribute to some extent. But it is important to not make the mistake of thinking the bank has to work on any problem that India has, because the bank may or may not have the scope or expertise.
The bank has a brand name that some people like, but not all people. Sometimes it will be good to have the World Bank advice, sometimes it may be counter-productive. So we have to be smart about that. One main advantage is that we have worked in almost every country in the world including the ones who are (going) through the same phase that India is currently in. Even if the countries are different, they struggled with the same issues. Sharing those experiences will be helpful. That would also mean we need money, because you cannot work on implementation without money. I want the strategy to be specific and special to India.
The World Bank is facing some harsh criticism for lacking enough resources for development assistance compared to its sister organisation, the International Monetary Fund. How would you respond to this?
Countries do not pay budget money to IMF, they only commit reserves. In many cases, this can actually be done without parliamentary approval, while paid-up capital in the World Bank, without exception, has to be approved by Parliament and appropriated from the budget. Obviously, it is a really difficult time for doing that. On the one hand, it is fair to ask questions about whether the bank has enough money to play the role it aspires to play and that is an important question for me in my new job. My own reaction to that is it is totally fair for India to say that if you want to play that role, we would like you to have more money to implement the programmes. India’s ministry of finance has been quite vocal about it and finance minister P. Chidambaram raised the issue in Tokyo (during the IMF-World Bank annual meeting). I find that helpful. It is not a easy question. But there is a strategy to maximise (the utilization of) the money available now. Personally, I believe it is important for a global institution like the World Bank that it grows with the world. We have a portfolio of $24 billion in India. No realistic person in India would call that a small amount of money. We could easily lend $3-5 billion this year if we have the programmes to support. It is not going to solve the problems of India, but it is a big amount of money.
Now that India has graduated to a lower middle income country, do you see India continuing to be the largest borrower from the World Bank or do you think the bank will now on provide more solutions to countries with lesser money?
I personally like solutions with money. India looks big mainly through its size. But if you look at the level of per capita income, then it is significantly behind some countries that benefited a lot longer from World Bank support and it did not taper off (for them) at the stage where India is now. So I don’t think tapering off resources for India is the right strategy. In the World Bank’s methodology of measuring per capita income, India is at the same level as Nigeria, Ghana and Vietnam. Not many people will advocate tapering off of resources to Ghana or Vietnam. So why would India be different? Because it is bigger? It needs more money because it is bigger. I think we should be a meaningful, reliable development partner for India. I think India can still benefit from that type of partnership and that is what the Indian government is asking for. So my job is to make it work.
The Indian government has embarked on a path of cash transfers. The Bank has a history of supporting governments in this area.
In terms of giving people cash or food, I am an economist. Nobody in the world prefers in-kind payment over cash payment. The issue is how do you incentivise people to use the cash in the right way. Ultimately, if a person is sick and dying, in my view, he should have the option of buying medicine rather than grain. So I will always say cash is a better solution, but not unless (it is done) in a way which incentivises the behaviour in terms of the objective you are trying to achieve and build institutions around that. There are exceptions to that. In the aftermath of disasters, cash is not the solution. It is great to know what works in Mexico, but it would be a big mistake to assume that it would work in India without evaluating it carefully. We should not reject it out of hand either.