‘Build green & inclusive cities’

New Delhi: The Asian Development Bank expects India’s economy, which has shown resilience to global economic headwinds, to grow at 7% in the current financial year. But the multilateral agency may lower its growth forecast for FY24 from 7.2% made earlier, ADB President Masatsugu Asakawa said. He said ADB is scaling up climate financing and will back India’s goal of developing green, inclusive cities. On restoring global supply chains, Asakawa said the solution lay in a rules-based international trading system, open markets and more discipline on export restrictions. India should capitalize on its large working-age population even as it starts to prepare for an older population, he said in an email interview. Edited excerpts:

What are the positive signs and headwinds ADB sees for the economic prospects in Asia and India?

The region continues to face multiple challenges, including the recent tightening of financial conditions in advanced economies, the Russian invasion of Ukraine and the slow emergence of China from its zero-covid restrictions. However, despite these challenges, we have seen the resilience of growth across the region. This is largely due to the reopening of economies, which has helped to offset the slowdown in growth and demand in advanced economies. The easing of pandemic restrictions in China is expected to have a positive impact on the region’s economy and, as a result, we will likely revise upwards our December 2022 growth forecast of 4.6% for developing Asia.

As for India, its economy has shown resilience to global economic headwinds in 2022 (fiscal year ending 31 March 2023) and is likely to grow by 7%. However, the country may not be immune to the global slowdown expected in 2023. And so, ADB’s growth forecast for India in 2023 (fiscal year ending 31 March 2024) may be revised downwards. Nevertheless, the domestic economy in India remains strong and I expect that India will continue to be among the fastest growing major economies globally.

I am pleased to see that the government has continued to prioritize investment in India’s infrastructure, even as it moves along a path of fiscal consolidation. Connectivity and logistics are central to India’s development strategy. Along with other measures, such as efforts to reduce the compliance burden on firms, streamline India’s labour regulations, and implement the production linked incentive scheme that aims to attract large scale investments (domestic and foreign) across a range of manufacturing subsectors, we expect India’s manufacturing sector to become more competitive and integrated with global value chains. All of these initiatives will equip India to drive growth in the medium term through by both industry and services, with good prospects for job creation.

What are the chances of Asia and India making headway in eliminating poverty, a sustainable development goal, by 2030?

We are at a critical juncture in our progress towards achieving the Sustainable Development Goals by 2030. The pandemic has disrupted progress on poverty reduction in our region by at least two years. The impacts may be even more severe if other dimensions of poverty are taken into account.

However, despite the setbacks caused by the pandemic, our research shows that if economies in our region can revert to pre-pandemic growth prospects, the extreme poverty rate can still be reduced to less than 1% in Asia and the Pacific by 2030. This is the case for India as well. India’s economy has been doing well in the post-pandemic period; so it should be on track to bring extreme poverty to negligible levels by 2030.

But it is important to note that there are still a number of uncertainties. For instance, economic growth may be affected by looming threats of stagflation, food insecurity, energy price shocks, debt burden, geopolitical tensions, and other risk factors, including those posed by climate change. To mitigate these effects, we need to expand targeted social protection coverage as our region moves towards post-pandemic recovery.

What are the goals that ADB would like the G20 to achieve this year under India’s presidency?

We are very keen to support the government of India during its G20 presidency. Let me highlight three ways where ADB can play a strong role in G20 this year. The first is to help bring the regional voice to the G20. This is important not only because many of the world’s biggest challenges are being felt most acutely across the region, but also because we have so many things to offer in terms of solutions, which other parts of the world can benefit from.

The second is by supporting India’s focus in this year’s G20 on cities. ADB recognizes the urgent need to mobilize financing for green, inclusive, and competitive cities. We look forward to helping India move this agenda forward during its G20 Presidency.

Finally, our G20 engagement is an opportunity to highlight the many initiatives ADB is taking to “evolve” so that we can serve our developing member countries even better. For example, (i) we are currently reviewing the bank’s capital adequacy framework; (ii) we are scaling up our climate financing, and we plan to release a new climate change action plan later this year; (iii) we are revamping our organizational structure; and (iv) we are launching the replenishment of the Asian Development Fund, ADB’s fund for the poor and most vulnerable.

Your thoughts on the prospects of global supply chains getting repaired?

In coordination with the private sector, a collective and coordinated policy approach can contribute to supply chain resilience. We need to uphold a rules-based international trading system to promote open and fair trade by exercising more disciplines on export restrictions, reducing supply chain bottlenecks, and keeping markets open. Governments should also assess supply chain risks and conduct collective scenario testing to mitigate future disruptions. We should also discuss how to promote the adoption of digital and other technologies for more efficient and resilient supply chain management.

Are weakening currencies and declining exports major threats for developing economies in Asia? Is this trend likely to get reversed in the near future?

The slowdown in major economies, combined with rising interest rates, high energy and food prices, and geopolitical tensions, are weighing on Asia’s export and economic growth prospects. Despite robust growth in the region’s merchandise and services trade in 2022, weak global demand will likely temper export growth this year. The PRC’s exports shrank sharply in December 2022 due to weakening global demand. Southeast Asia’s exports have also declined in recent months, driven by softer demand from the PRC, which is ASEAN’s largest trading partner.

Growing uncertainties in growth prospects and worsening financial conditions could put pressure on capital flows and local currencies. Since the US Fed’s first interest rate hike in March 2022, net non-resident portfolio inflows turned negative. Regional currencies have also seen a steep decline in their values against the US dollar, led by Sri Lanka rupee, Japanese yen and Korean won. Debt-to-GDP ratios have increased across sovereign, corporate, and household sectors, threatening debt sustainability in some economies.

With a tight labour market, the US Fed will likely maintain its tightening stance for the time being. This suggests the current trend of weakening currencies and declining exports will continue. Despite remarkable progress in local currency bond market development and intra-regional trade and investment, the share of domestic currency in Asia’s cross-border debt liabilities remains only about 15%. More than half of Asia’s total debt assets and liabilities are denominated in US dollars. The dollar also continues to be the most preferred currency for trade invoicing for the region (87% of the region’s exports were denominated in US dollars in 2019, while dollar invoicing accounted for 77% of the region’s imports). A depreciating local currency against the US dollar decreases an economy’s balance sheet capacity, due to an increase in the value of (dollar-denominated) liabilities relative to the asset side, resulting in a further tightening of local financial conditions.

The region’s policy makers need to remain vigilant in monitoring financial market conditions and guarding against a build-up of systemic risks and potential spillover effects. Policy measures could include temporary capital flow management and foreign exchange measures, and macroprudential arrangements. Together, economies in the region should also strengthen an array of safety nets, such as their international foreign exchange reserves, bilateral swap arrangements, and regional financial arrangements, such as the Chiang Mai Initiative Multilateralization.

Is ageing population a challenge for Asian economies?

Yes, population aging poses serious challenges to Asian economies. Let me highlight two of them: Firstly, sustaining growth in the face of less favorable population structures; and secondly, delivering affordable, adequate and sustainable old-age income support.

Fortunately, there are many policy measures that Asian economies can take to address the challenge. For example, promoting greater female participation in the workforce can mitigate labor shortages, and building stronger pension systems can strengthen the economic security of older Asians.

It is also important to note that while Asia as a whole is ageing, there are substantial differences across countries. Japan and Korea are at advanced stages of population aging, while India and Indonesia are still relatively young countries. For younger Asian countries such as India, the priority must be to capitalize on the large share of the working-age population — known as the demographic dividend — even as they start to prepare for an older population.

Finally, the demographic transition presents opportunities. Older Asians are now generally living longer, are healthier, and are better educated than in the past. It is possible to extend their working years through job retraining, flexible work arrangements, anti-age discrimination laws, and other measures. This will enable them to make a sizable contribution to both growth and old-age income support.

Given the different development trajectory and needs of different nations in the Asia pacific region, which are the geographies, where ADB would like to direct more resources in coming years? And which are the geographies which may become less reliant on ADB funding in future?

ADB’s priorities and support are guided by the evolving needs of its developing member countries and the challenges they face in their development journey.

Rather than focusing on particular geographies, ADB pursues a differentiated approach to address varying development needs of each of its DMCs.

For example, countries in fragile and conflict affected situations and small island countries face severe institutional capacity constraints and may require support for institutional development and governance reforms.

The lower and lower middle -income countries need to sustain and accelerate the pace of progress and may need assistance in developing infrastructure and social services.

The upper middle-income countries may differ in economic development, social challenges and capital market development. To respond to your question, lending volumes will not be the criteria of ADB assistance to, say, upper middle-income countries. For them, the ADB assistance would be more in the form of value-addition and knowledge base in areas of regional public goods, climate change, urbanization, regional cooperation or emerging social issues such as aging.

Which are the major borrowing nations as of now and the total outstanding loans to those countries?

The top five borrowers of the ADB are India, Indonesia, the People’s Republic of China, Pakistan and the Philippines. The total outstanding loans to these countries are $82 billion as of the end of 2022.