What India Can Lend

netherland_modi

World Bank needs to reinvent itself and match pace of GoI’s economic narrative

Pictures: World Bank chief in India with Arun Jaitley and other captains of commerce; MNodi in Portugal and Netherland

By DANFES

Prime Minister Narendra Modi’s itinerary in his current trip to Portugal, the United States and the Netherlands reveals a telling economic pattern. In their 2009 paper, ‘The Role of the Structural Transformation in Aggregate Productivity’, economists Margarida Duarte and Diego Restuccia analysed Portugal’s `catch-up’ with the US economy. The study’s conclusions hold promise for India and other countries seeking to join the club of advanced economies.

The employment generation achieved by the US in manufacturing and services, along with the corresponding productivity rises from 1870 to 1956, was achieved proportionately by Portugal in only 39 years from 1956 to 1995. Accumulation of technology, knowledge and learning from the experience of other countries helped late-starters such as Portugal.

`Make in India’ resonates with Portugal’s story and validates GoI’s steps to further increase the footprint of services sector in India, particularly in IT, more so in the context of changing policies of the US for Indian companies based there.

The Netherlands, the third country Modi is visiting, presents a classic case of agricultural productivity triggered, export-driven, job-led growth, showcasing how Holland managed to overcome its own `Dutch disease’ riding on increasing farmers’ prosperity .

The growth story in these countries is illustrative for India. It also helps that the world markets are buoyed by India’s democracy nurtured growth trajectory revved up by recent bold economic initiatives such as the goods and services tax (GST).No wonder, the tsars of the US economy are toasting Modi, and these countries are eager for enhanced trade and cooperation. An increased global footprint is essential for `Make in India’ and India’s service sector initiatives.

THE BANKABLES

Global economic institutions need to be part of this emerging and exciting economic saga. They also should swiftly move to consolidate the promise India holds not only for itself, but also for the developing world that looks to India for leadership. Against this backdrop, Modi’s visit to the US also brings into focus the potential role of another Washington-based institution -the World Bank, given its Bretton Woods mandate.

Apprehensions of its fast-eroding relevance are a constant refrain in the bank’s corridors, given the declining dependence of emerging countries on its money. The space for plain vanilla-type of lending -to lay roads or build infrastructure -is indeed shrinking with increased access to fiscal resources, and the narrative shifting to `minimum government and maximum governance’. The emphasis is on building an ecosystem that enables and incentivizes private capital to create assets and provide services.

The World Bank needs to reinvent itself and match the pace of the economic narrative of India’s government to build this ecosystem to leverage market liquidity for solid results. This is not to discount bank supported success stories -including in India -but to underline the fact that the bank should not miss the bus in India, hosting one-sixth of the world’s population and currently on a resolute policy push that is so very central to its remit.

Given the challenges that punctuate India’s economic landscape, it cannot get more interesting in terms of policy. Stranded assets abound from non-performing assets (NPAs) of banks, and the ultra mega power plants to farm loan waivers. India is grappling with these issues with its own customized solutions, such as the asset recovery companies, rescheduling liabilities and outright write-offs.

SOME INNOVATION

It is an ideal situation for the bank to display its problem-solving skills -with its AAA-backed partial risk guarantees, coupled with the International Finance Corporation (IFC) and the Multilateral Risk Investment Guarantee Agency (MIGA) risk mitigation instruments to reduce financing costs to give these NPA companies room to meet contractual obligations and improve operations to recover.

Partial credit instruments can help municipal governments raise bonds that can help increase their public accountability and provide much-needed resources to build smart cities.The recent encouraging results of the Pune municipal bonds point out the imminent need to scale this up.

The bank’s credit guarantees could also help untangle the farm loan waiver conundrum to provide head room to commercial banks to raise market resources and reschedule their contingent liabilities up to a point, where fiscal space opens up with overall growth. Simultaneously, the bank can help strengthen the credit access along with risk mitigation in the farm sector and help expand the Micro Units Development and Refinance Agency (MUDRA) and Startup India initiatives for job creation and technology incubation.

These prescriptions are part of a difficult puzzle and are easier said than done. But the World Bank’s instruments have proved their leveraging potential in the Latin American credit crisis and elsewhere. India’s current initiatives present a historic opportunity to the bank to reinvent it by adapting to a strategic role.

In his path breaking book, Thinking, Fast and Slow, Nobel Laureate Daniel Kahneman refers to the propensity of substituting a difficult question with a simpler one. Instead, the bank would do well to deploy innovative instruments that can further decisive policies of GoI’s double digit growth, rather than choosing the easier and slower path of vanilla lending.