India is a bright spot for growth, aided by domestic consumption: ADB’s Albert Park

Incheon: India can achieve a growth rate of over 8% in the long term based on productivity growth, investments and infrastructure building, said Albert Park, chief economist Asian Development Bank. However, he flagged the use of production-linked incentives (PLI) scheme for attracting investments as protectionist, stating India should consider policies that avoid direct subsidies. 

In an interview, Park said India should prepare for the European Union’s carbon tax on imports but should raise concerns if the tax makes trade prohibitive. India should be open-minded about adopting ADB’s energy transition mechanism while adhering to its net zero emissions policy by 2070, he added. Edited excerpts:

What macroeconomic headwinds are likely to impact India the most among emerging economies in the short term?

India is going to grow fast. Our projection is 6.4% this year and 6.7% next year, but they have been downgraded over time because of growing headwinds related to high commodity prices, inflation above the central bank target rate and inflation kind of affecting consumer sentiment and spending. But relative to most countries in the region, India is a bright spot for growth on the back of domestic consumption. 

The growth slowdown in Western countries and now we have the banking crisis kind of hitting the US, which doesn’t look like there’s contagion to Asian countries, including India, but if it becomes a big crisis in the US financial system, then it will lead to squeeze on credit in the US, and that will spill over into the rest of the world. 

The government has a pro-growth stance on infrastructure, and they’ve given some tax relief to citizens to encourage them to spend a bit more. They’re trying to make the regulatory environment more supportive, especially labour regulations which creates some confidence among investors and consumers. I’m personally not a huge fan of the PLI, although globally, we’re seeing a lot of industrial policy that is somehow protectionist in the way or trying to pick winners.

If there are other countries which have supportive policies, why should India not consider a similar policy?

You have to stay competitive by supporting your industries. I think it’s better to try to argue that in the old world of multilateral trade, if other countries were doing things unfairly, you would take them to the WTO and institute sanctions, or there would be some kind of countervailing duty against those countries exports to you, but that’s different from subsidizing your own firms in response. 

The US implementation of the Inflation Reduction Act and the Chips Act, which are strong industrial policies with a protectionist component, has led to similar responses in Europe and China. India has an instinct, which is also to use industrial policy and also still be a bit protectionist on imports. All of these countries are forgetting a really important lesson that competition is what really promotes productivity and innovation, which is going to make economies more competitive.

Should India relook or discontinue PLI?

Industrial policy has always been controversial among economists. Economists tend to be sceptical of the industrial policy unless it’s very well-targeted to areas which you think are emerging areas of comparative advantage, and it’s better to provide support for perhaps research and development or technology transfer, things that can benefit the industry but avoid direct subsidies. But even if you do, it should be temporary.

Do you feel someone will drag India to the WTO?

The WTO doesn’t seem to be functioning that well these days because so many countries just ignore it. So, I’m not sure whether there has been a discussion of that, but at least India now is not a huge exporter of these goods yet.

There’s a lot of talk on climate financing, yet, the Indian economy continues to remain coal-based.

India has made ambitious commitments to net zero. India stands to lose a lot from climate change. There are several ways in which the cost for India is quite high from climate damage. Now, of course, India acting on that doesn’t guarantee anything because it only works if the whole world is successful. But given you know how important India is to global outcomes, to some extent, they can internalize this that it’s to their interest. But of course, it’s not that easy, and it will take some time probably. But I think it’s definitely the right direction to go, especially because renewable technologies are now so cheap.

Even though India is coal-dependent, there should be a focused intention to shift away, and the government is doing that; they’re investing quite a lot and renewables, but because it’s easy to just go into a business-as-usual mode, it’s important enough for India, and given that India’s already made the net zero commitment for them, to really think hard and there, maybe ADB is trying to support member countries to make this transition away from coal.

Can India reach its potential growth target of, say, 8% plus in the near future?

I think it’s possible. China grew at double-digit growth rates for three decades. So it’s possible.

Do you see upward pressure on interest rates in India to continue?

India’s central bank has been very good, vigilant about the inflation risk and understanding the desire to get rid of core inflation. Most of our projections are that inflation will moderate pretty much everywhere to different degrees, but because global commodity prices are moderating and we’ve actually seen oil prices jump up after the Opec supply decision, now they’ve come down because people are feeling that with the banking terminal or things that demand is not going to recover. 

China’s oil imports have not really recovered dramatically yet, so it’s a gradual recovery, which is good for inflation in India. If things stay the way they are, and nothing crazy happens in the world, then it should be okay.

What’s your assessment of the transition finances required for transmission into cleaner energy?

We estimate for the region, investment in new energy was like $470 billion. It would have to go up to $700 billion, which would require a 40% increase in financing.

What kind of policy reform is needed for India to accelerate the pace of growth?

No shortcuts to growth because India has a demographic dividend, but they need to complement that with investments in human capital. The learning poverty estimates for India are quite high. About 15 years ago, policy debates were all about protecting sectors, but now, the discussion is very different, and it is about where we are going to get growth, so they are tackling some of the barriers. 

But for productivity growth, you really need good investment, technology transfer, R&D, a good business environment, and infrastructure. India has a lot of potential, so I feel like the energy should go and continue to go in that direction and not towards protectionism or excessive industrial policy.

India wants to adopt this China-plus-one strategy. Can it fill in the gap?

There’s potential, but they still have some work to do. They’re benefiting right from the whole anti-China, or decoupling efforts away from China. We saw some big companies moving there to some extent, like Apple, Foxconn and Samsung. 

But India needs to make it attractive for businesses to locate, which means infrastructure investment, human capital, taxation, and de-regulation, and they can’t tax imports that are intermediate inputs. That’s going to be very negative. The world has these very complex value chains and supply chain networks, and when you start putting in tariffs here and there, it really undermines your ability to fit in and be competitive.

What’s your view on the carbon tariffs that the EU has imposed on Asian and Indian imports?

For India, it’s mainly steel and aluminium exports to Europe, and they’re trying to make these clean by having these sectors’ factories use clean energy. It’s interesting, but I don’t know how you can separate the source so cleanly. There is an extent to which a lot of countries feel a protectionist policy by Europe, and countries who are adversely affected should raise their concerns. But if it’s going to happen anyway, then what you need to do is adapt. 

The hidden benefit of the Carbon Border Adjustment Mechanism programme is that it does really put pressure on countries to get carbon pricing into their system and maybe can accelerate carbon pricing and transition. But there are a lot of implementation challenges for the programme. For instance, how do you get the information? How do you distinguish even among different companies? There can be two different companies exporting steel, one is using clean energy, and the other is not, but they’re just using some average. So, it’s not really fair. 

All of this kind of, and it’s really hard on countries that don’t have the information to prove the content, the carbon content of their goods because then they’re just going to make some really negative consumption and pose a pretty high taxes. So, I think India should prepare for it. It can levy a tax on exports, but maybe the import tax is so high that trade becomes prohibitive.