Harnessing private capital is a key challenge for multilateral development banks (MDBs) as the risk-return ratio is not feasible, says NK Singh, who along with former US treasury secretary Lawrence Summers is the co-convenor of a G20 expert group on strengthening MDBs. The first part of the report on developing MDBs by the expert committee will be made public today. India is trying to leverage the G20, of which it holds the rotating presidency this year, to make MDBs more effective for loans to developing countries. Singh, who serves as the chairman of the Fifteenth Finance Commission, added that states will need to enhance revenue and improve quality of expenditure to attain more growth. Edited excerpts from an interview:US treasury secretary Janet Yellen has said measures underway will help MDBs to raise $200 billion over a decade.
If you go through the terms of reference for MDBs, first is the mandate, and then the vision and what is expected. We first address that (in the report). Suppose after addressing it, we come to the conclusion that X (amount) is needed, the next story then is how that X (amount) has to be financed. The MDBs have two big components—one is the domestic resource mobilisation, which is the major part and requires action from (G20) member countries. Some member countries are better equipped to do it. Domestic resource mobilization basically means growth, revenue buoyancy, structural reforms, economic policy changes, etc. The other component is how to increase lending capacity within MDBs. It’s in the range of $120 billion (annually). The idea was to triple it (in a decade to over $300 billion).
So you break that down and what amount of this is concession financing. Then a big chunk will come out of the IBRD (International Bank for Reconstruction and Development).
The financing module... this itself is a challenge.
Another major challenge is how to harness private capital. So, there’s a whole range of issues like risk mitigation. How does it avoid issues relating to moral hazard? Private capital expects a high rate of return. The returns are private, risks are public. Restrictions are there that are preventing private capital from coming in. Mitigating exchange rate risks also costs money. But since everybody believes that there’s a whole lot of private capital floating around, but that these guarantors are not getting it, so it’s an issue.
Why do you think private capital is not flowing in?
Because the return risk ratio is not acceptable.
How to address this?
You have to wait for the report. There are many areas which will be addressed in the second part of the report, which we are giving at Marrakesh on 13 October.
One of the areas, which we have intensely outlined on what we want to work on, is private capital. Prime Minister Modi has highlighted the need for fiscal discipline by states. But some states believe that the central government is curtailing their spending ability by including certain public sector borrowings within the state fiscal deficit limit.
You need more growth. You need more taxes. You need more tax buoyancy. Tax buoyancy right now is just about catching up with the overall GDP numbers. In many states the tax buoyancy is exceeding the lows.
Of course with the GST, the room to manoeuvre is much more limited except for two to three areas, which I have recommended in the finance commission report. So to say, property taxes (in India) are one of the lowest in the world.
Many states don’t have it. It is a resource waiting for them to be harnessed. Other areas are real estate, petroleum products, and liquor.
They have a huge opportunity waiting for them. Then the other issues are—expenditure patterns, how much of the expenditure is revenue expenditure as compared to capital expenditure.
They need to reflect on expenditure priorities.
That will impact long-term growth. If they continue to harness revenue expenditure, they are not going to get (long-term) growth and if there’s no long-term growth there’s no buoyancy. Reprioritizing expenditure is needed rather than cutting expenditure.
Two things are important: enhanced revenue and improved quality of expenditure.