India has the potential to grow at a double-digit annual rate but lack of adequate policy action may hamper the prospects, warns S Hafeez Rahman, director-general of the Asian Development Bank’s South Asia department. He tells Vrishti Beniwal we must continue on the path of fiscal consolidation but an increase in tax rates at this juncture is not a solution. Edited excerpts:
How do you look at the global crisis’ impact on India and the evolution of the economy?
The evolution has been very impressive. Before this crisis, the economy was growing at nine per cent annually. Since the Lehman Brothers’ collapse and the more recent euro zone crisis, that has dipped a bit. If you look at what is happening to the rest of the major emerging markets, India’s growth is still solid and the medium-term outlook is good. Fluctuation in the agriculture sector still matters and, so, improving investment and productivity in it is very important. I think the slowing in manufacturing is temporary and it will pick up once the euro zone crisis is over. The growth in the services sector is robust and that is a cushion.
However, the Indian economy is at a crossroads because it has evolved in a certain direction. It has come to this eight-nine per cent growth rate region and needs to break this threshold over the medium term. It can do that by addressing some policy issues. Infrastructure needs to improve; there is a need to ensure a much more liberal investment climate for both domestic and foreign investors. Other problems are related with the investment sector and broadening the base of the manufacturing sector, labour market, land acquisition and environmental sustainability.
These are difficult times for the Indian government, faced with multiple problems. What is the biggest challenge, in your opinion?
Fiscal consolidation must continue. It is a big challenge. We know the food security bill is going to add to public expenditure. It could add up to nearly Rs 40,000 crore or 0.4 per cent of GDP. This means efficiency of the Public Distribution System will have to really improve a great deal. Issues have to be dealt with in the entire food distribution and marketing chain. Of course, we support the Bill, but it is important to address this issue.
I also feel in the short term, one has to try and address the slowdown in investment. There is a sense of investment and market sentiment weakening. So, the government should take some initiative on the policy front and carry out reforms on the structural side. They have taken steps on the external side by removing the ceiling on NRI (non-resident Indian) deposits and allowing greater investment in the stock market. All of this will help but India needs much larger capital inflows. China’s capital inflows are much larger. India must and can do much better. Some of these can be tackled in the short term. The middle income trap is a medium-term challenge. Growth needs to be much more inclusive.
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Are you saying there is a policy paralysis and the government should have been more pro-active?
I can’t say whether there is a policy paralysis but the reforms have been slower than I would have expected in recent years.
Should they exit from stimulus and increase tax rates?
An exit from stimulus is also a problem. It is a difficult choice. The room for fiscal maneuvering has come down significantly, compared to three years ago. The room for maneuvering on the monetary side is also very limited. You can already see the Reserve Bank’s stance has shifted from controlling inflation to supporting growth. I don’t think raising taxes would be a good policy in this situation.
Has ADB aid been put to effective use in India?
We have done a lot of evaluations and found we have been effective in providing assistance. The bulk of it has gone to roads, power transmission, water supply and sanitation. We are very pleased with the way our portfolio is performing in India. In a couple of years in the past, India has exceeded China’s performance in the portfolio.
What are your future plans?
We need to stablise because we have increased our lending in recent years and this year, for the first time, we have crossed the $3 billion-mark (Rs 14,900 crore) from both public and private sector windows together. We need to consolidate to $2.5 bn to remain effective and for our portfolio to remain high-performing.
