Closer integration with Asia can benefit India amid global trade uncertainty: AIIB chief economist

A lot of recent developments have led to uncertainty in trade and investment at a scale larger than covid-19 or the global financial crisis of 2007-08, Erik Berglöf, chief economist at Beijing-based AIIB, said, responding to a question on rising protectionism in the US and its impact on exports from Asia and on investment flows into the region.

Multilateral agencies are part of the solution in stabilizing global markets and in making capital flows more transparent, he said, speaking to Mint on Sunday on the sidelines of Kautilya Economic Conclave organized in the national capital by the Union finance ministry.

Berglöf said that policy discourse in India is evolving, particularly in relation to the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and India’s constructive engagement within Asia, especially China. Economists from China were part of the Kautilya Economic Conclave.

“I think there is so much for India to benefit from closer integration in Asia. And Asia in general still has a lot of integration benefits to be had," said Berglöf.

In August, Prime Minister Narendra Modi and Chinese President Xi Jinping met on the sidelines of the Shanghai Cooperation Organisation meeting in Tianjin and agreed that the two countries were development partners and not rivals, and that their differences should not turn into disputes.

India is the second-largest shareholder in the Beijing-based development bank after China.

“There are still a lot of differences and many policies that could be harmonized more," said Berglöf. “I am not saying that India necessarily should join RCEP or CPTPP, but it is a good conversation to have."

The chief economist said AIIB was planning to significantly step up its investment activities in India, which will help mobilize greater private sector and multilateral financing for projects in the world’s fastest-growing major economy.

AIIB has already deployed $12 billion in India, of which $1.8 billion is in the private sector, Mint reported on 29 July quoting AIIB vice president Ajay Bhushan Pandey. AIIB has a loan book of about $60 billion and is aiming to step this up.

Berglöf said that AIIB invests about $2-2.5 billion in India every year. “My sense is that we will be able to increase that significantly," he said. The focus is not just on the amount it can lend, but on how much can be co-financed with other multilateral development banks (MDBs) and the private sector, he said.

Co-financing has become a core of AIIB’s approach as it brings multiple benefits, he said. “It allows us to align on standards, increase transparency, and help the private sector better understand how we operate. Even if the amounts seem small relative to India’s needs, the real value lies in leveraging these investments to bring in other MDBs and, crucially, mobilize private capital," said Berglöf.

He said AIIB was working with the Indian government, especially state governments, on several sectors, including traditional transport, energy, water and digital infrastructure. The country’s green transition is offering investment opportunities, he said.

According to Berglöf, China’s financial sector is far more engaged in the green transition than India’s and he suggested that developing schemes or incentives to involve commercial banks more actively in India’s green transition could significantly amplify the impact of these efforts.

“Additionally, compensation schemes based on technology or natural capital could be explored. This is particularly relevant for adaptation efforts in India, which will be crucial given the challenges related to water, nature, and climate resilience," he said. “Providing resources and scientific guidance to states could significantly strengthen local adaptation efforts."