West Asia conflict may create challenges for India: ADB Chief Economist

Park says that if Donald Trump returns as the US president, it could be bad for Asia, including India

Asian Development Bank (ADB)'s Chief Economist Albert Park believes the government should focus on farm-policy reforms to address the issues caused by climate change and liberalise foreign direct investments (FDI) and trade. In an interview on the sidelines of the Kautilya Economic Conclave in New Delhi, Park tells Ruchika Chitravanshi and Asit Ranjan Mishra that if Donald Trump returns as the US president, it could be bad for Asia, including India. Edited excerpts:

How do you see India’s growth prospects amid the current turbulent times?

The ADB recently released its Asian Development Outlook on September 23. We are forecasting India to be the fastest growing economy in Asia, growing 7 per cent this year and 7.2 per cent next year. We're very bullish on the Indian economy. A lot of good things are happening. A very strong government investment, infrastructure investment, improved ease of doing business, and very strong confidence among consumers [is visible]. It looks pretty positive overall.

What are the risks?

There are some risks to the outlook, both for the region as a whole, and also for India. A lot of people are concerned about what may happen with the US election outcome in terms of possible changes in US trade policy. If (Donald) Trump wins, he's promised to raise tariffs against China and raise tariffs against the whole world, which obviously would be very negative for Asia. Asia has benefited historically from export-led development. Anything that's going to disrupt international trade is going to be a negative for the region. We’re also concerned with the conflicts in West Asia. We've seen oil prices jump. We're concerned that Israel may bomb Iranian oil facilities that would definitely create a spike in oil prices. We know from what happened during the war in Ukraine that shocks to oil or commodities create challenges, especially for India, which is an oil importer, but also for many other countries in the region that are also relying on oil for energy. And finally, now for some years, with global temperatures at all-time highs, we're concerned about shocks from the weather. India in particular may be strongly affected by higher temperatures. We know there are high-heat periods already and increased frequency of natural disasters pretty consistently these days in Asia.

You touched upon the possibility of Trump becoming the president. Do you think Trump will also be bad for India?

One thing we know about (former US) President Trump is he's quite unpredictable, so sometimes it's hard to read. But from what he has announced, the promise to increase tariffs will be a negative for India. You could argue that if the tariffs are increased with China to very high levels, it could create opportunities for other countries in the region, including India, to replace Chinese exports. But Chinese exports to the US have already gone down quite a lot with the current tariff structure.

Overall, we think it's a bad thing, because the more that the world has higher trade barriers, the less efficient are the global value chains and the overall production efficiency. And this increases the cost of producing everything, and that, in the end, hurts consumers and will weaken demand, which will ultimately hurt producers.

What do you think are the key reform areas that the government should be focussing on in its third term?

There are many things but some of them are hard in India such as agriculture-policy reforms. But it’s still important, especially for India, to address the climate change issues to reduce certain types of agriculture subsidies that encourage emission-intensive agriculture. Liberalising FDI and trade are needed to maximise opportunities for technology transfer and productivity improvement.

What do you think of some of the measures that India has launched, such as the production-linked incentive (PLI) programme to boost manufacturing?

India’s PLI programme provides subsidies to large firms in targeted sectors. The desire to catalyse industrial development is understandable and it is good that the subsidies are temporary (for five years). However, such industrial policies are never a panacea. Successful industrial development also requires many enabling conditions including infrastructure, energy, logistics, ease of doing business, and available talent. 

Also, industrial policies are more likely to work if they do not undermine competition and if they support sectors in which the country has already demonstrated capabilities.