Policy makers are hopeful that the current account deficit will come down to around 2.5 per cent of GDP in the next three years. However, Rajat Nag, managing director-general of Asian Development Bank, tells Nayanima Basu & Indivjal Dhasmana the target seems difficult. However, he says India can revert to eight per cent yearly GDP growth if it continues to improve the investment climate. Edited interview:
ADB had pegged India's economic growth at six per cent for the current financial year and 6.5 per cent for the next one. It was five per cent in FY13. So, in the first three years of the 12th Five-Year Plan, economic growth would be lower than the targeted average annual of eight per cent but Prime Minister Manmohan Singh in his address yesterday stuck to it. Do you think it is feasible in the 12th Plan?
We think eight per cent is feasible. But if you look at the trend, then the point we are making is that you need to make the investment climate favourable. So, you've got to see these structural reforms which have begun to be implemented and consolidated. Once that happens, India's investment story is just beginning, so depending on what happens on the investment side, I think an eight per cent growth rate is certainly feasible.
The decisions which could be taken by the government at this level have been taken, such as the land acquisition Bill, partial decontrol of sugar and elimination of fuel subsidies. Now, there is a legislative process which comes in and which is uncertain. But I think once these structural reforms happen and investments happen, an eight per cent growth rate is feasible.
India has other growth potential in terms of the size of the market and the productive labour force. But there are road-bumps ahead, such as the investment climate and lack of adequate skilled labour, which is why education and skill development must be a priority, and the whole issue of governance. These all play into the investment climate.
The government has projected India's CAD to be around 2.5 per cent over the next three years. Do you think that is achievable?
It is going to be difficult. It is now about five per cent (of GDP). Getting it down to 2.5 per cent is most desirable but our projections are 4.4 per cent this fiscal and down to four per cent next year. It depends on the growth scenario and the export market. The demand for exports has to increase. On the import side, the demand for oil will be difficult to bring down but gold imports could be much less.
When do you see this eight per cent growth happening?
At the moment, we are saying 6-6.5 per cent for the next two years. If the investment climate improves in the next two years, it might happen sooner. But these are all based on certain assumptions.
There are huge infrastructure needs in the region. Do you think the resource base of ADB is sufficient to finance these?
We will have a certain level of lending with our resources. We will have to catalyse resources. We have to bring in private capital and we have to bring in public-private partnerships. So, I think our role is increasingly going to be to create leverage, as an institution which not only provides finance but mobilises finance. So, I do not think we should look only at our capital base. We are looking at ways at which we can enhance our capital base but that it is a separate issue. There is no doubt that the needs of the region are much higher than what we can provide and, therefore, we have to focus on ways to mobilise from the private sector.
Do you think there is a need to have a BRICS (Brazil, Russia, India, China and South Africa) Development Bank when ADB is already there, at least for Asia?
In the macro sense, the need for infrastructure in the region is $800 billion in Asia and BRICS is not just about Asia. ADB provides, of the $22 bn of our total operation, roughly about 70 per cent for infrastructure needs. Still, it is absolutely minimal compared to the needs of the region. So, any institution such as BRICS which comes in and provides more resources for infrastructure development is welcome. The needs are much more than anyone's capacity. So, in that sense, BRICS would essentially provide resources which are not in competition. We, as an institution, are going to cooperate with them when they come up.
ADB has been headed by a Japanese since the 1960s. The World Bank and IMF are headed by Americans or Europeans, though the emerging countries are asking for more leadership positions in these institutions. When do you see reforms taking place?
We have just had a new president elected; he will finish his term. Then, the shareholders will have to decide what they do next. The only thing our charter says is, the president has to come from a region of the member-countries and they are all free to nominate.
