'There is too much stress on debt management'

Q & A/ Praful Patel

In his new capacity as vice president, South Asia region, World Bank, Praful Patel wants to take the Bank's relationship with India to the next level.

In his first visit to India after assuming the new charge, he plans to initiate fresh dialogue with the policy makers including Finance Minister Jaswant Singh on what the World Bank can bring to the table in the changed environment when India is aspiring for a larger role in the global space.

Patel joined the World Bank in 1974 and was a primary driver of the Bank's Africa Capacity Building Programme. In an interview to P Vaidyanathan Iyer , he said, "India's main worry is its cost competitiveness which it can enhance by investing significantly in infrastructure sectors." Excerpts:

In your new profile, what will be your focus areas and priorities as far as India is concerned?
My challenge is to take World Bank's relationship with India to the next level, so that the goal that India has to attain 7 per cent plus growth is met.

I have also begun to look at sectors where we need to do much more and I have already identified some strategic areas such as infrastructure.

There is no doubt that what India needs to do to attain a 7 per cent growth is substantial investment in infrastructure.

India is very competitive today in terms of its labour force. It is world-renowned for its skilled, English-speaking labour force.

But all this is wiped out in the additional costs that the private sector is burdened with due to inadequate power supply.

To enhance competitiveness, the most critical gaps that India needs to address include power and transport.

My challenge is to see how the World Bank can significantly increase its support and strategically address the infrastructure sector, even as it continues to contribute to the ambitious health, education and other social development projects as laid out in the Tenth Plan.

This is to ensure that India does not find itself in a situation where it has fantastic health and education statistics to show but no global trade due to poor competitiveness.

So what exactly do you plan to bring to the table in your dialogue with Indian officials?
We are willing to re-assess our support if India wants. My approach will be to ensure that India gets from the World Bank what would be an integrated response.

India has substantive scope for accessing International Bank for Reconstruction and Development (IBRD) loans, which are distinct from the International Development Association (IDA), the latter being highly concessional loans carrying an interest rate of 0.75 per cent to be repaid over 40 years.

While in IDA, India has an allocation of $ 850 million a year, there is less of a limit on IBRD loans. The trick is going to be in optimising the mix of International Finance Corporation (IFC), IBRD and IDA loans.

In my view, it would be limiting if India did not maximise or optimise its support from the World Bank for investment in infrastructure sectors.

The implication here is India will be holding back the investment it needs to make in these sectors because of some other non-economic factors.

As long as India has projects where the rate of return is higher than the cost of IBRD loans, there is no reason why it should not be availed of from the Bank.

Even as the debate about reining in the fiscal deficit by reducing the dependence on borrowing and prepaying external debt on the back of strong forex reserves continues, India should think how it can best optimise its debt levels within the broad parameters.

India has prepaid almost $ 2 billion of its high-cost debt to the World Bank and there are clear indications that it would continue to prepay such debt in the future too. How does World Bank look at India's new debt management strategy?
A prudent debt management strategy is an integral part of managing your economy. But while evolving a borrowing strategy, you should not just look at the cost but also the conditionalities and other attendant issues.

The debt management strategy should not be one that says there should be no debt or no borrowing because without the necessary investment in infrastructure, India will not have the basis for the 7 per cent-plus growth that it aspires for.

If you look at the last financial year and even the current year, you will find that a significant part of the development budget is funded by external borrowings. And this will continue for some time.

I am trying to see that the mix is right for infrastructure investment since there is a lot of pent-up demand in the sector.

Secondly, I want to ensure that India's access to resources from the World Bank is at an optimum level and is not underpitched.

Recently, India wanted to be among the countries that shared its expertise with Africa? Has World Bank started a dialogue with India?
About 10 years ago, we initiated a capacity building foundation for Africa for which the World Bank has provided about $ 170 million of grant as funding.

One of the first things I did while I was on the board of governors, was to ask if India would want to become a member of the foundation.

Till now, besides the African nations, the other members included a dozen American and European countries. This is the first time that India will actually provide technical assistance to Africa.

I think India is moving on this path of positioning itself as a global player, and by being part of activities like this, it can open up new vistas for the country.

This could be a two-way street where India provides what Africa needs and Africa, in turn, opens up business opportunities for India. The India Development Initiative is the right move in this direction.

All the members of the foundation including the donors believe that Africa has reached a stage where there was a need to build this south-south cooperation.

What is the optimum level of infrastructure funding that India can access from the World Bank given the new thrust on debt management by the country?
As far as IBRD loans are concerned, in principle, there are no limits. The question that you should ask is if the investment plan as outlined in the tenth plan document is sufficient or anaemic.

If you look at the plan, there is too big an emphasis on debt management and limiting external borrowings. The result on the other side of the equation is that the investment programme is anaemic.

What you will find then is that four or five years later, when the pace of development has picked up, infrastructure is a constraint. And in that situation, you cannot turn on the engine immediately. It will take you another four or five years.