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Fiscal situation, level of public debt in Indian states a concern

India?s GDP growth would fall to a decade-low of 5.6% this fiscal and it could tick up a bit to 6.7% in the next fiscal only if the government expedites the reform measures announced in September and clears the backlog of projects soon, Asian Development Bank (ADB) managing director general Rajat M Nag tells FE?s…

India?s GDP growth would fall to a decade-low of 5.6% this fiscal and it could tick up a bit to 6.7% in the next fiscal only if the government expedites the reform measures announced in September and clears the backlog of projects soon, Asian Development Bank (ADB) managing director general Rajat M Nag tells FE?s Arun S in an interview. Nag said a major uncertainty facing India?s and Asia?s growth is the economic situation in the United States and Europe. ADB forecasts inflation in India to touch 8.2% in 2012-13 and then slip marginally to 7% in 2013-14, he said. The government could find it challenging to meet the fiscal deficit target of 5.3% in 2012-13 and bringing it down to 3% in 2016-17, he added. Another issue that Nag said India and China have to deal with is the rising inequality and the need for inclusive growth, as well as ?green growth? or lack of it. Nag also said the world is viewing the robust debates on corruption in India as part of a welcome process. Good governance is a key condition for democracy, he said in the interview, adding that good institutions and accountability that goes beyond corruption are necessary conditions for India?s growth story to continue. Edited excerpts:

What is your view on India?s subsidy regime and its impact on the fiscal deficit?

The high fiscal deficit has been a major concern. The government has recognised it. We appreciate that the government has put together a fiscal consolidation plan. The diesel price hike and capping of subsidised LPG cylinders are steps in the right direction. Any subsidy is regressive because you end up subsidising the rich who consume more. However, we do recognise there are political imperatives. But there are well-known measures of dealing with that by having, for example, a lifeline tariff or saying that a minimum consumption of LPG or fuel will be at a certain limited price.

ADB had recently loaned $400 million to West Bengal. Have other similarly debt-troubled states, like Punjab, approached the ADB for loans and is that a concern?

The situation in the states often is almost similar to what we see at the national level. The fiscal situation is a concern as is the level of public debt. We look at public resource management issues as high priority for the states as well.

Within our overall resource envelope ? which is constrained ? we provided sovereign loans worth about $2.6 billion to India last year. The largest ADB lending last year was to India. We will be looking at all the demands of other states. I don?t want to discuss which other states have approached us.

We have a large pipeline (of funds) in energy, transportation and public resource management. We operate in 25 Indian states and 17 of them are lagging. There is a constraint on the resource side and there is huge demand, so the government will have to do the balancing act and decide where they want to use our resources.

What are the objectives of ADB?s proposed dollar-rupee swap agreement with India and in which priority sectors will it be used?

It will be mainly used for infrastructure, particularly renewable energy ? wind or solar. Nowadays, banks are quite flush and financing is not a constraint if the credit-worthiness of projects are good.

But we want to develop the Indian capital market for a better match of assets and liabilities and tenors of assets and liabilities. Bank loans usually tend to be for shorter terms, while some of the projects need longe-term finance. So it is a question of us not providing a product which is in competition with the banks. What we are trying is to extend the tenor and deepen the capital market.

Are there plans for an ADB-anchored private equity fund specifically for the infrastructure sector?

These discussions are ongoing. We support investments in infrastructure as we think that (infrastructure deficit) is a major constraint to India?s economic growth. We are looking at all options. It is going to be a mix. If we find suitable opportunities, we could provide equity or debt to infra funds. But these will have to be subject to due diligence. We recently created an Asean infrastructure fund ? an equity investment from ADB where we put in $150 million and Asean countries put in additional equity thereby creating a $500-million equity fund. So we are always looking for suitable opportunities. We want to catalyse investment like we did with the Asean investment fund.

With talks on the Brics Development Bank progressing, do you see any change in ADB?s role in the future?

The need for development assistance in Asia Pacific is so huge that ADB will still have an important role to play in mobilising and leveraging finances in the foreseeable future. The region needs $8 trillion in the next 10 years or $800 billion a year just for infrastructure. ADB?s annual operations ? our own funds plus the co-financing we mobilise ? are less than $20 billion a year. The multilateral financing which we bring to the table is still very small compared to the region?s needs. A large part of that has to come from the private sector. I think another institution (like the Brics Bank) could add value by bringing its resources and leveraging.

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First published on: 12-11-2012 at 02:05 IST
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