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Last Updated : Jun 30, 2016 11:06 PM IST | Source: CNBC-TV18

Brexit impact quite muted on India;GST key for economy: World Bk

CNBC-TV18's Shereen Bhan caught up with the World Bank President Jim Yong Kim who is in India and started by asking him about his views on Brexit and its impact on the global markets.

Brexit was hands down the biggest global macroeconomic event in June. The verdict of Britain exiting the European Union (EU) has taken the world by surprise and jolted the markets across the globe in a reaction to this uncertain outcome, said World Bank President Jim Yong Kim.

However, one market that has remained relatively muted to Brexit repercussions will be India, he told CNBC-TV18's Shereen Bhan in an exclusive interview. That is proved in the recent rebound the Indian stock markets showed post referendum results.

He is of the view that there has been a shift to safe havens like gold, Japanese yen and US treasury for the investors.

With a growth of 7.5 percent, India is the fastest growing economy in the world, Kim said, adding, that he is impressed by PM Modi’s boldness in introducing the Bankruptcy Law—much-needed for investment environment— and the recent push for passing the Goods and Services Tax (GST) Bill, which is critically important for India.

Below is the verbatim transcript of Jim Yong Kim’s interview with CNBC-TV18's Shereen Bhan.

Q: The last conversation that you and I had the world was continuing to look uncertain and deal with the fragile economic recovery and things haven't changed since then. We are now faced with the possibility of Brexit. The vote is at least in. Article 50 as and when it will be triggered will start the process of the UK exiting the EU and we don't know when that is going to be. But this is the last thing perhaps that the fragile global economic recovery needed?

A: Many people were surprised. Many people thought that the vote wouldn't happen that way but this is a democratic process and the vote went as it did. We are watching a lot of different things. Of course as the World Bank Group our biggest concern is what will this mean for developing countries. Now luckily in India it seems like the impact will be relatively muted. There is not a huge amount of exposure. The stock market went down for a bit but then it rebounded quite nicely and that is an indication of the health of the Indian economy today. It is the fastest growing economy in the world at around 7.5 percent. So, for India it doesn't seem like there will be such a big impact but we are following many other issues.

What will happen to the oil and gas prices. There are many different forces going on right now. Commodity exporters in developing countries have been having huge problem with overall growth rate that is approaching zero and it was over two percent last year. So, there are many different things. The world, global markets don't like uncertainty and one of the things that we are seeing that is definitely happening is flight to safety. Gold, US treasuries, even Japanese Yen paying negative interest rates of course, German bonds are still extremely popular despite the fact that interest rates are negative there and so what that means also is that access to finance for developing countries will probably get worse.

Q: Since we are talking about capital flows and we are talking about the impact of all of this on the emerging markets and your are absolutely right that is playing out in the Indian stock markets. It seems like India is perhaps better protected from the Brexit shock but my question to you on what this means as far as the possibility of the unravelling of the EU itself is concerned. How worried are you, how real do you believe that possibility is?

A: What I think is happening is that at first it seemed that it was a major vote against multilateralism and globalisation and of course at the World Bank Group we are multilateral. We believe very strongly in globalisation. In fact in many ways we are the symbol along with the United Nations and other banks like us of a multilateral world. So, we still very firmly believe that the multilateralism is not only a good thing but it might be one of our best, greatest hopes for building a world that is more prosperous, is more at peace, is growing for everyone. So, we believe in the multilateral system. Right now there are many in the UK that are beginning to realise that this very strong vote against globalisation, against multilateralism may have many more unforeseen bad effects than they might have thought.

Q: Since we are talking about multilateralism and globalisation, isn't there a real threat now that we are moving towards de- globalisation? In terms of cross border money flows we have actually seen them retreat to levels last seen a quarter of a century ago, countries are becoming or seen to be becoming a lot more protectionist. Isn't there a real threat to globalisation today?

A: There is certainly tremendous sentiment against trade for example, you see it in the US election process, you also see as part of the Brexit vote. However, here is our perspective on it. The benefits of trade are almost directly related to how poor the country is, not how poor the people are. It is a pretty simple idea then in order for poor countries to become wealthier they need to trade, they need to be involved in the exchange of goods and services and so we are very strong proponents of trade. However, we are strong proponents of trade because it is the only way that we are going to have any hope of achieving our goals which is to end extreme poverty and boost shared prosperity.

So, we are trying to provide a very different perspective on trade. I think the notion that if you seal all your borders everything will be better, I think that if countries actually try to do that, they are going to see all the many knock-on effects, all the many negative side effects of trying to do that.

Q: Aren’t we already starting to see that happen?

A: I think that European Union (EU) is still intact and Britain is still part of the EU, they have just got this vote and my hope is that given the anger that is there right now you have to be able to understand the anger. The anger comes from middle class people who feel like they have not done well in globalisation.

If you look at the numbers of who has done well in globalisation, just about every group has done better because of globalisation except the middle class in developed countries.  We should not be surprised by this but we need to now double our efforts to find ways of providing new skills to these middle class people to find ways of growing the economy in a way that includes everyone including those who are so angry right now.

Q: The explanation that you have just given and this is borne out by the Brexit vote, does this also explain to a large extent the rise of Donald Trump in the US?

A: I am an American citizen, I have been there for a long time but I wouldn’t venture to guess any explanation for that. I think there is anger there in United States.

Q: No way of explaining how Donald Trump has got to where he has?

A: Let me say there is a lot of anger, there is a lot of frustration. I grew up in a small town in Iowa state in the center of the country and many of my friends are supporting Donald Trump but many of them also feel that their lives are not better than their parents and the prospects for their children are not better than their own. So, I think that for any person who grew up in the middle class life in the richest country in the world that has led to many of them getting angry.

Again I think that the challenge for American leaders but for leaders all over the world is to think about ways of growing economy that is inclusive, that is core to what we do at the World Bank Group, share prosperity as one of our two primary goals. The whole plan of that is to say can we find ways of growing economies in which everyone can participate. I think that is the most important task any of us have and it is one that we are working on here with Prime Minister Modi for India.

Q: I will talk to you about India in just a second but since we are talking about trade and we are talking about globalisation, let me also ask you about the impact of what we are now seeing these new trading partnerships that are emerging. The Trans-Pacific Partnership (TPP) for instance, India is not a party to it. And the view, perhaps, at the start was that we would not be impacted so much by it, but now, there seems to be a change of heart and we are now trying to come to terms with the new reality as far as these trade relationships are concerned. How do you see trading patterns being redrawn on the back of these changes?

A: I work very closely with Roberto Azevedo, who is head of the Worth Trade Organisation (WTO) and we share a view that developing rules that will make trade fairer and broader, that will make it work effectively for everyone is a critically important goal. It would be great if the WTO could move forward and bring together a global trading agreement, but in the absence of that, in the meantime, we are going to see the smaller trade agreements.

Now, the TPP has been attacked by just about everybody, but we really believe again that the path toward more economic growth, more economic growth that will benefit everyone is to find ways of signing these agreements in a way that is fair for everyone. And I cannot stress enough that for those of us who are ending poverty in the world, we need more trade, not less.

Q: But this brings up the debate which is on at the WTO and perhaps, that saw the round related to the development issues, the Doha declaration, the possibility of that finally being dead at this point in time. This business of what the developed world wants and what the developing world, countries like India want, that battle now seems to be playing out and the friction seems to perhaps be at its worst today.

A: There is that friction, but what we are trying to do is we are trying to make it ever more clear to both the developing and the developed world that our fates are intertwined. And where is this most clear? Climate change. Climate change, this is not something that one country can just turn off. We are seeing the impact of it everywhere, but now we have got to find a way to both mitigate, meaning reduce carbon output and adapt, meaning build systems that can withstand extreme weather events. We need to do both of those things. We need to find the financing for it, we need to move quickly.

Now there was a great agreement at COP21, but a political agreement is one thing. Actually getting the projects done on the ground so that we are reducing carbon output and helping people adapt, that is a different issue. That is one way where our interests are aligned and we are now the largest funder of climate change related activities in the world.

Another is forced displacement. The refugee crisis has made it very clear to the Europeans that their fate is directly intertwined with what happens in the Middle-east and North Africa. But what we are also seeing is that there are refugees coming from sub-saharan Africa as well. So, we are trying to look at these problems that show how intertwined we all are and using those as ways of having the kinds of discussions we need to have.

So, what do we need to do in the Middle-east and North Africa in order to prevent conflict? Can we go upstream and invest in development so that that likelihood of conflict goes down? We are not sure, but we are trying to do this. And of course, there are many other ways. Pandemics, we just put together a pandemic emergency insurance policy. Never happened before. And we did this because it is something that does not affect just one country or just one person, it affects everyone.

That, to me, is the clearest example of why multilateral organisations, global organisations like ours are so critical. We need to keep reminding everyone that no matter how much you think that you can separate from the rest of the world and control your own fate, your fate is not in only your hands. You have got to learn how to work with the rest of the world.

Q: Speaking of the rest of the world and you put out your forecast in June, you have downgraded your growth forecast for large parts of the world. In fact it is now down to about 2.4 percent from your earlier projection of about 2.9 percent. India stays at about 7.6 percent. Do you believe that there is now further possibility of a downward revision given the uncertainty that the Brexit throws up?

A: We are watching very carefully and I couldn’t give you a number right now, we are watching very carefully. Markets don’t like uncertainty, investors don’t like uncertainty, we will see what happens. Today is less uncertain than Friday when Brexit was voted on and on Monday when the markets opened again, so we will have to see.

Q: What would be the biggest risk besides the uncertainty around Brexit, of course the commodity markets continue to sort of flounder at least crude between USD 45-50 per barrel range. Do you believe that there continues to now be more pressure as far as crude prices are concerned because that is going to impact a large part of these economies that were still grappling with a possibility of a recovery?

A: There are multiple forces. We know that as more investment goes into the US dollar because oil prices are so connected to the US dollar, that could bring oil prices down. On the other hand Norway is talking about reducing its output, if that is the case, that would bring oil prices up. So, I think there is a balance. Our estimate for the price of oil on an average we it's still holding up but it is not going to be over USD 50 per barrel. We still think it's still going to remain relatively low.

I don’t see anything that would in the near future raise commodity prices. Do we see another kind of investment explosion like happened in China over that long period of time? We don’t see it right now and this why we are especially concerned about commodity exporters. In terms of the overall risks, there is a high level of indebtedness in the private sector in developing countries which is a concern for us.

What we are seeing with Brexit now is you are seeing the leaders, Prime Minister Cameron, but chancellor Merkel, President Hollande and others, the things we are hearing from them are let's do the right thing for the global economy as a whole and so I hope that whatever it is that they do will help to bring a little bit less uncertainty to picture.

Q: You talked about debt as being one of the big problems and that brings us to the issue of China and burdened with debt at this point in time, perhaps some would say at the point of no return. You still believe that it is going to be an orderly sort of winding down in China?

A: We don’t see any people talk about hard landing, we don’t see any evidence that there will be a hard landing in China. What China is doing is extremely difficult. Here is the second largest economy in the world saying a few years ago, we are going to fundamentally shift our growth model and move away from investment and exports and move more toward services and consumption. It is not easy for an economy to turn like that. However if you look at what is happening in China right now, are there weaknesses? Sure. Do the Chinese authorities know what they are? Absolutely. The minister of finance and the central bank governor whom we work with very closely are completely aware of the weaknesses in the Chinese economy. However if you look at changes, remember one day they let the exchange rate float a little bit, last summer there was this reaction and so what has happened since then is they now communicate much more clearly about why they are making particular policy moves and that new level of communication I think has helped. Now services are more than 50 percent of the economy, consumption is up.  Is there over investment still? Sure. They understand that but unwinding that is going to mean looking carefully at how to do that in the context of job losses. We know that there are going to be bumps in the road but they are now moving towards what we think is a much more sustainable path of economic growth. It is going to be difficult, there are going to be times when there are rocky period but we think they are moving in the right direction.      

Q: Let me now focus on India because I have last couple of minutes left with you, the macroeconomic picture is looking a lot better, inflation is lower, the twin deficits are under control at this point in time. What to your mind would be the risk to the India today perhaps some would say it is the burden of expectation.

A: I think that right now India has a little bit of space to look forward to the medium and the long term. One of the issues that I am talking about on this particular trip is that India has a very high level of childhood stunting. Now over the last 10 years quite literally just in the last 10 years we have a much clearer idea of the implications of the childhood stunting. We now know from much more sophisticated imaging techniques that children who are stunted actually have a fewer neuroma connection in children who are not stunted.

We also know that their ability to learn and earn is lower than the non-stunted children. Now the other thing that we have learned literally over the last 10 years is that there are ways of reducing childhood stunting very quickly. India has 38.7 percent childhood stunting and the concern I have if you look into the future, what are the paths of economic growth that will be open to India. Agriculture is hugely important and we know that we have to improve agriculture productivity, but agriculture almost certainly will become more capital intensive, more technology intensive.

You look at light manufacturing there is this phenomenon that people are calling reassuring where light manufacturing is becoming itself so capital and technology intensive that it is moving back to the developed countries. If low scale agriculture and working in light manufacturing are not options than people will feel lower ability to learn. What are they going to do, so one of my concerns is that India needs to now prepare for the economy of the future.

What’s the economy of the future going to look like is certainly going to be more digital. It is going to required digital competencies of all its citizens and we are not sure what the different paths will be. Now when I was a president at Dartmouth someone told me that graduates 5 years out from Dartmouth 40 percent were in jobs that didn’t exist when they graduated. So if that’s the future then the one infrastructure that everyone has to invest in is grey matter infrastructure. The infrastructure of your brain and so one of the messages that we carry here on this trip was India has done so well on so many things, it is actually a fantastic programme to reduce childhood stunting. There are so many capacity, Prime Minister Modi is completely committed to investing in his people. We think India can make rapid progress and prepare for whatever that future economy will look like much more effectively if they tackle this issue of childhood stunting.

Q: Since we were talking about the economy of the future and the steps that government need to take to ensure that. In terms of some of the measures that have already been taken and some that haven’t, are you disappointed perhaps that the government ought to have been bolder in trying to address the NPA situation to try and bring down government ownership of banks? Do you believe that perhaps there should have been much more bolder measures taken by the government to address that and do you believe that is a key risk facing India today?

A: I think if you look at the different measures, Prime Minister Modi announced so many bold measures simultaneously, so even if you look at small things like for example the bankruptcy law that were put into place, this is so important for the investment climate. We just done a study on logistics and India went up 19 places and now the country that they are just behind is Portugal in terms of logistics and so the reforms that have been already announced are extremely bold and some of them the goods and services tax which would be so critically important, Prime Minister Modi put that out, but other political parties that in existence also have endorsed it, but right now it start, if these things happen, if all the things that Prime Minister Modi has already announced actually can happen in the context of the political climate in India. India will be a very, very different place. Swachh Bharat is itself a hugely ambitious programme. The privatisation of banks we feel that there is plenty of evidence to suggest that the gradual effective, thoughtful, careful privatisation of state own institutions can be extremely helpful for countries. We have done this in countries that have communist governments. We have done lots of these projects in Vietnam and we have been working with China on them as well, but these are very controversial issues and so every leader has to the boldness of reforms with the practicality of getting it done in particular economic context. We are impressed with Prime Minister Modi’s boldness on so many different issues and we are simply try to support him in making them to come to fruition.

Q: What do you make of the comments that are coming in from people like Subramanian Swamy, a member of the BJP, Rajya Sabha, MP as well and there is this debate now or discourse on Swadesi economics, that is Indian economics or whatever he would like to call it versus the kind of economics that the World Bank pushes forward. Do you believe that this is going to be a cause for concern and it is also going to lead to friction here within the economic space?

A: From the first day I met Prime Minister Modi now it is two plus year ago he demanded to see the evidence. And in every single instance when I have been able to present him evidence he has moved on the evidence and he has moved very effectively. So, those of us who work in these multilateral organisation are on one hand involved in finance and the other hand involved in knowledge we all are so grateful to be able to work with the leader who actually listens to and acts on evidence. So, we don't want to have an ideological argument about economics. We want to take very specific sectors, very specific programs and debate the evidence.

We think the evidence for the things that we are recommending are absolutely impeccable. We would not recommend to the Indian government something which was based purely on ideology. We stick to the evidence. I come from the field of medicine and one of the revolutions in medicine that happened just in the 1980s was that we went from being sort of based on what a clinician thought was right to being based on evidence. Development has been moving in that direction but we at the World Bank Group are completely committed to it. If somebody has a better idea and they have evidence to support that idea bring it on. We would be happy to debate it.

Q: In terms of evidence on the ground is India truly an easier place to do business today, despite what the World Bank reports says?

A: We will see. We are doing the surveys right now. But in terms of logistics India has moved more in terms of improvement of logistics than any other country in the world. That is very real. It is very hard to debate that. I see a movement around some of the Prime Minister Modi's top goals in the government that I have been told by others who know it well that they had not seen before. So, I think that Prime Minister Modi understands very clearly the power of setting concrete goal with a concrete deadline. And when you do that the different organisations that are in charge of it have to then look at themselves very carefully and say, oh my goodness. So, what do we have to do very differently in order to achieve that goal. We would like to see even more goals, maybe even see one for stenting. We will see but I think the change is real and now India is the destination of more foreign direct investment than any other developing country in the world. That tells you something. In other words investors are voting with their feet.

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First Published on Jun 30, 2016 03:49 pm
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