Upgrading the services sector is very important: Changyong Rhee

Interview with Chief economist at the Asian Development Bank

Changyong Rhee, chief economist at the Asian Development Bank, here for the Delhi Economic Conclave, tells Dilasha Seth that India's economic growth in the coming financial year would depend on implementation of reforms by the Centre. Edited interview:

There were reports that ADB had put a condition on raising tax rates in West Bengal while approving a $400-million loan for the state.
I don’t think it should be regarded as an unwelcome conditionality. The deteriorating fiscal situation in Bengal has put more pressure on public resources, constraining the delivery of public goods and services. To get the confidence from investors and for long-term sustainable growth, strengthening the tax administration and improving expenditure rationalisation and targeting are key steps. The government understands this well. You can think about it as a policy development and support to improve the situation.

 

Why is ADB lowering India's growth projections so frequently? For the year so far, it has cut India's GDP forecast four times, from seven per cent to ultimately 5.4 per cent. Do you think economic dynamism is changing so fast in India?
Last year, we did not do a quarterly forecast but only biannual adjustments. From this year, we have tried a quarterly forecast. So, the fact that we did four revisions in a year does not mean economic conditions are worsening much faster than in previous years. Having said that, I think the slowing of the Indian economy this year was much more than expected.

But we have some high expectations after September, when the government expedited many delayed reform bills. In our last forecast, we used statistics up to August. After September, we are observing some signs of improvement but it is still premature to change our forecast. The reform needs to be accelerated to be credible.

So, as some reforms happened, do you expect next year to witness faster recovery than you had projected?
Against 5.4 per cent growth this year, we have forecast 2013-14 GDP growth at 6.5 per cent. But the recovery depends on whether the reforms the government is pushing are credible and how quickly they’re implemented to improve investors' sentiment.

Though 51 per cent FDI (foreign direct investment) in multi-brand retail has been voted by Parliament, traders are afraid they will be finished. Are the apprehensions justified?
I understand the impact of large retailers on small mom and pop stores should be a serious concern from the perspective of inclusive growth. That can be handled by many other policies than banning foreign investment. Remember, upgrading the services sector in India is a very important issue. There is a large and growing services sector but it is mostly concentrated in the low value added and traditional services segment.

Without competition, without more capital inflows, it will be really hard to change the structure and productivity of the sector. If you really care about mom and pop shops, there are many other policies than blocking competition. For example, in Korea, we allowed Walmart to come in; they’re now on their way out, as the local markets are much better. Why are Indians so pessimistic? You might become better due to competition.

How do you see the US fiscal cliff affecting India in this financial year?
I am cautiously optimistic that US politicians will resolve the fiscal cliff issue properly for themselves and the global economy. I do not want to think of the other scenario, as it will cause huge problems for the global economy.

What impact do you see of the third round of quantitative easing by the US Federal Reserve on emerging markets? Do you believe in the theory that, on the one hand, it will help appreciate India’s currency and a commodity price rise on the other?
A difficult question. There is no convincing academic evidence so far to show the result clearly. For some economies like Singapore, Hong Kong and Japan, which are much more open, we see some evidence for large capital inflows and currency appreciation pressures. For other emerging markets, it will be fair to say the evidence is yet mixed.

On the other hand, it is hard to support the view that the US should not have done QEs. Without QEs, if the US economy has much deeper recessions, emerging markets are more likely to suffer together. At this moment, the US QE has a mixed impact and it’s hard to say it is a bad policy or good policy from Asian economies’ point of view.

So, the key issue is once global economic conditions are stabilised, how to withdraw QEs properly to minimise its spillover effect. But, at this moment, we are not at this stage.