'Issue of mom & pop shops could be handled by giving them subsidies'

Q&A with ADB chief economist Changyong Rhee

Asian Development Bank (ADB) chief economist Changyong Rhee says that an agreement with West Bengal government to raise tax rates while the multi-lateral insititution cleared $400 million loan to it was not a condition. He tells Dilasha Seth that India's economic growth next fiscal would depend on implementation of reforms taken by the Centre. Edited interview:

There were reports that ADB had put conditions of raising tax rates in West Bengal, while approving $400 million loan for the state. Is it a correct fact?

I don’t think it is a condition. If you look at the local government, they have a large public deficit. Now if you have large deficit, it is very hard to get the confidence form investors. So this is not a conditionality, but agreement with the local government so we provide infra, but also about how to improve local public finance situation so this development can be sustainable. You can think about it as policy development to improve current situation.

Why is ADB lowering India's growth projections so frequently? For this fiscal so far, it has cut India's GDP forecast four times from 7% to ultimately 5.4%. Do you think economic dynamism is changing so fast in India?

Last year we did not do quarterly forecast, but only biannual adjustments. But from this year on, we tried quarterly forecast. So the fact that we did four revisions in a year does not mean that it is different from previous years'. However, having said that I think this year the slowdown of Indian economy was much more than expected which was kind of surprising, as to why investments are dropping so quickly in India.  But now, we have some high expectations. In our last forecast, we  used statistics of up to August and September, but recently there are some signs of improvement after these reforms.

So as some reforms happened, do you expect next fiscal to witness faster recovery than you had projected?

Against 5.4% growth this fiscal, we have pegged 2013-14 GDP growth at 6.5%. But then recovery depends on whether reforms that Indian government is pushing are credible and how quickly are they implemented.

Though 51% FDI in multi-brand retail has been voted by our Parliament, traders are afraid that they will be finished. Do you think their apprehensions are justified?

I understand the impact of large retailers on small mom and pop, is an important issue. That can be handled by many other policies, joining or direct subsidy for mom and pop industry. On other hand, upgrading service sector in India, is very important issue. It’s like upgrading industrial sector in India. Services industry is large and supports growth. But If you look at quality of service industry, it is not high quality and not creating good jobs. Without competition, without more capital inflows it will be really hard to change it. If you really care about mom and pop shops, there are many other policies they can do without blocking competition. For example in Korea, we allowed Wal-Mart to come in, now they are on their way out as the local markets are much better, why are Indians so pessimistic? You may become better due to competition.

How far have these latest reforms taken by India- land acquisition bill clearance, FDI retail, aviation, the Cabinet Committee on Investment helped in boosting sentiments on India globally?

India has the world’s best intellectuals. They have good policy makers. India has been known as the intellectual society, so  you don’t need any extra knowledge. From outside, what we know is you have a democracy, which involves a lot of debates, getting everybody’s opinion. But implementation is what outside people are looking at right now. So, the fact that the present government is pushing at these reforms is now regarded very highly. But whether you deliver or not is the big question the world is looking at. Second is that you need more infrastructure, and it is important for industrial development. We all know that India unlike China went from agriculture to services. You need more industry sector development for which you need more infra, which is a key, and also land acquisition law. But how fast you can deliver these is a concern.

How do you see the US fiscal cliff affecting India in the current fiscal?

I leave the fiscal cliff issue to US as they know much better that it will not just create US problems but also global problems. So I am optimistic and we have to see.

What impact do you see of the third round of quantitative easing by the US Fed Reserve on emerging markets? Do you believe in the theory that on one hand it will help appreciate India’s currency and commodity price rise on the other?

That is a difficult question. There is no academic evidence so far to show the result clearly. There are two issues- whether the excess liquidity spills over to the emerging markets and actually increase currency price appreciation or commodity price increase. Though theoretically it is really possible, however the evidence is not very clear. For some economies like Singapore and Hong Kong, which are much more open and for Japan, whose currency is a safe haven we see this impact really happening,  but for other emerging markets it will be fair to say that the evidence is mixed. On the other hand if you ask if they shouldn’t do is it good for Asian and emerging economies, I would say that if US has recession, emerging markets will have more problems. At this moment 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. If they don’t do it and it aggravates recession it will create pressure for the Asian economies. So I think, the key issue is once global economic conditions are stabilized, how to withdraw QEs properly, but at this moment we are not at this stage.