Shaktikanta Das: South Asia's current macroeconomic challenges
and policy priorities
Keynote address by Mr Shaktikanta Das, Governor of the Reserve Bank of India, at the
high-level Conference co-organised by the International Monetary Fund (IMF) Asia and
Pacific Department (APD) and the IMF South Asia Regional Training and Technical
Assistance Centre (SARTTAC), New Delhi, 6 January 2023.
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I am delighted to have been invited by the IMF to join this distinguished gathering here
today to discuss pathways to resilient, sustainable and inclusive growth in South Asia. I
am happy to note that the conference proceedings will be anchored by the research
findings and policy recommendations of the book titled "South Asia's Path to Resilient
Growth". In the current international setting, global trade and growth outlook appear
uninspiring, and policies have to be conducted amid a whirlwind of uncertainty. At such
critical times, conferences of this nature can help us better understand the evolving
scenarios and policy trade-offs. In my address today, I shall briefly cover some of my
thoughts on South Asia's Current Macroeconomic Challenges and Policy Priorities.
2. Looking back into history, the South Asian region has been a key hub of ideas,
commerce, art and culture, etc. The Indus Valley civilisation was among the three
earliest civilisations on earth and was the most extensive. In the so called middle ages,
trade and commerce flourished in a variety of commodities such as spices, precious
metals and other minerals, handicrafts and food items. Overall, the South Asian region
has had an outsized influence on the progress of civilisation and trade in the world.
Currently, the region accounts for about 25 per cent of world population. With a median
age of 27 years, it is one of the youngest regions in the world. The average growth rate
of the region has accelerated from 3 per cent in the 1970s to about 7 per cent in the
latest decade (pre-pandemic). Consequently, per-capita income levels have risen
alongside notable progress on key development parameters. As per the IMF estimates,
South Asia contributes nearly 15 per cent to global growth, led by India and
Bangladesh. The region also receives one-fifth of total remittance flows in the world.
3. The South Asian region has grown, responding to formidable global challenges in the
past. Following the food crisis of the 1960s, the region successfully implemented the
Green Revolution. After the oil shocks of the 1970s, emigration from South Asia to West
Asia became one of the largest market-driven labour flows. This, in turn, led to a
significant increase in remittance flows to the region. The Asian financial crisis of 1997
impacted the South Asian countries in terms of surges in capital outflows and exchange
market pressures. Over the years, as a crisis prevention strategy, the South Asian
countries prioritised sound macroeconomic policies and embraced financial sector
reforms focusing on competition, prudential regulation, enhanced transparency, audit
and accounting standards. These measures helped in preserving macro stability while
sustaining integration of domestic economies with the global economy.
4. In recent years, multiple shocks, in particular the COVID-19 pandemic and the war in
Ukraine, have dampened the economic prospects of the South Asian region, as in other
parts of the world. Some countries in the region have also been contending with the
ramifications of unsustainable debt and climate change induced events. Consequently,
they have been seeking recourse to the IMF's financing facilities. Notwithstanding these
challenges, as per the World Economic Outlook database (October 2022) of the IMF,
India, Bangladesh and Maldives would be among the fastest growing economies in the
world in 2022 and 2023. According to the Asian Development Bank's December 2022
outlook, the South Asian region's GDP is projected to grow at 6.5 per cent in 2022 and
6.3 per cent in 2023.
5. The World Bank estimates that regional co-operation could be a win-win situation for
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all countries of the region . For example, intra-regional trade is currently only one-fifth
of its potential, implying an annual shortfall of US$44 billion. The World Bank
assessment also suggests that a common electricity market for Bangladesh, Bhutan,
India and Nepal can yield savings of US$17 billion in capital costs. Investment in
transport and logistics could help reduce the cost for container shipments in South Asia.
According to a study by the IMF (2019) on South Asia, more than 150 million people will
enter the South Asian labour force by 2030. The dependency ratio is expected to
continue ebbing for almost two decades, indicating the strong demographic dividend the
region is set to reap.
Policy Priorities
I would now like to focus on some of the desirable policy priorities for the South Asian
region. I have identified six such policy priorities.
Taming Inflation
6. Multiple external shocks in the form of COVID related global supply chain disruptions,
food and energy crisis following the war in Ukraine, and financial market volatility arising
from the aggressive monetary policy tightening have exerted sustained price pressures
in the South Asian economies, as in other parts of the world. During the first three
quarters of 2022, food price inflation in South Asia averaged more than 20 per cent.
The region's heavy dependence on imported fossil fuels has made it vulnerable to
imported fuel inflation. For successful disinflation, credible monetary policy actions
accompanied by targeted supply side interventions, fiscal, trade policy and
administrative measures have become the key instruments. While the recent softening
of commodity prices and supply chain bottlenecks should help in lowering inflation
going ahead, risks to growth and investment outlook may rise if inflation persists at high
level. Prioritising price stability, may therefore be the optimal policy choice in the current
context for the region. The approach to disinflation, however, needs to be mindful of the
rising risks to the growth outlook in an environment of deteriorating prospects for global
growth and trade activity.
Containing External Debt Vulnerabilities
7. The surge in external debt in recent years and associated vulnerabilities have
undermined macroeconomic stability in several countries of the South Asian region.
External debt, which was already elevated in low- and middle-income countries (that
include all South Asian economies) in the pre-pandemic period, surged to US$ 9.3
trillion in 2021 from US$ 8.2 trillion in 2019, an increase of US$ 1.1 trillion.
8. The Debt Service Suspension Initiative (DSSI) was set up by the G20 in May 2020.
Up to December 2021, an estimated US$ 12.9 billion of debt service was deferred.
According to the World Bank, 60 per cent of the 73 DSSI-eligible countries are at high
risk of debt distress or are already experiencing it. It is estimated that total external debt
service payments on public and publicly guaranteed debt by poorest countries may rise
by 35 per cent to over US$ 62 billion in 2022 and to remain high up to 2024 due to
rising global interest rates and the compounding of interest on DSSI debt service
deferrals.
9. Even though the participation of private creditors was encouraged in the DSSI, their
response has not been encouraging. There has been a notable shift in the creditor
composition of low- and middle-income countries between 2010 and 2021. The share of
lending by private creditors in long-term public and publicly guaranteed debt was 61 per
cent in 2021 (46 per cent in 2010) and the share of debt owed to bondholders was 47
per cent in 2021 (29 per cent in 2010).
10. A distinct shift in the creditor base over time in favour of private lenders and
nonParis Club official creditors has added a new dimension to debt restructuring processes
for the low-income International Development Assistance (IDA)-eligible debtor
countries. The share of debt owed to non-Paris Club creditors rose to 68 per cent in
2021 from 42 per cent in 2010. The increasing reliance on private creditors has raised
debt servicing costs and complicated creditor coordination in debt resolution efforts.
During 2010-2021, the average maturity on loans from private creditors was 12 years
as compared with 26 years for loans from official creditors, and the average interest
rate on loans from private creditors was 5 per cent vis-à-vis 2 per cent on loans from
official creditors.
11. The role of multilateral organisations, particularly the IMF and the World Bank,
becomes crucial in making debt treatment efforts more effective, while also
strengthening the mechanism of recording, reporting and analysis of debt data so as to
enhance transparency and preserve debt sustainability. The IMF's role in capacity
building in the region, with a focus on region specific macro dynamics, policy
effectiveness challenges, and economic aspirations of the nations would also be helpful.
Raising Productivity
12. While sustained and broad-based economic recovery remains the current policy
focus, it is necessary to undertake deep structural reforms to raise the potential growth
trajectories of the economies in the South Asian region. Ongoing global realignment of
supply chains, green transition and advances in technology offer new opportunities for
investment and growth, but policies would need to create the congenial climate for
attracting new private investment, with public sector taking the lead in areas that can
create large positive externalities, such as infrastructure, education, and health.
13. In this context, let me highlight some specific areas of policy priority. First,
undertaking desirable structural change would require an improvement in resource
allocation - moving production from low productive sectors to high productive sectors
and promotion of innovation. Second, skill mismatches - a major constraint to resource
reallocation -would warrant policy focus on education and skill upgradation. This is
particularly important to the South Asian region, as the favourable demography of the
region would require that production processes must be labour-intensive while being
globally competitive. Third, while free trade and FDI have been conventionally
congenial for diffusion of technology and augmentation of productivity, the region's
investment on R&D must also increase from the current low levels, and the policy
environment for scientific research and start-ups must be made more rewarding.
Fourth, investment in physical infrastructure - energy, transportation,
telecommunication - which are prime drivers of productivity growth have to be
enhanced.
14. Infrastructure in the contemporary world of digital revolution would also include
digital infrastructure - data centres, cellular towers and fibre connectivity, with an
emphasis on scalability and resilience. Fintech, E-commerce, Ed Tech, Health Tech
and Food Tech are the new age growth propellers and need quality internet connectivity
and reliable digital payments.
Strengthening Cooperation for Energy Security
15. The South Asian region has a high reliance on fossil fuels and imported energy,
making the region vulnerable to volatile oil, gas and coal prices. In view of the
dominating influence of geopolitical factors in driving global energy market dynamics,
the region needs to strengthen energy cooperation arrangements so as to enhance
resilience to external shocks.
16. India and Bangladesh have already agreed to enhance the sub-regional
connectivity in the energy sector by linking the power grids of the two countries
synchronously. The India-Bangladesh Friendship Pipeline Project (IBFPP) - a 130 km
pipeline joining Siliguri in West Bengal and Parbatipur in Bangladesh - would have a
capacity to export petroleum products of one million metric tonnes per annum. Other
examples of cooperation include transportation of petroleum, oil and lubricants across
national jurisdictions. Similarly, cross-border petroleum products pipeline and joint
venture hydroelectric projects are testimony to the immense scope for energy
cooperation in the region.
17. Harmonisation of testing processes, performance and conservation standards, and
labelling criteria for electrical appliances in the region can contribute to regional energy
security by promoting cost savings and by boosting efficiency and trade. Integration of
national power systems in the region could facilitate leveraging of untapped surplus
hydropower while giving a fillip to development of solar and wind resources.
Programmes of bulk procurement and distribution of energy-efficient appliances can be
adopted by countries in the region. India, for example, has the UJALA (Unnat Jyoti by
Affordable LEDs for All) scheme for distribution of LED bulbs at an affordable price.
Cooperation for a Greener Economy in the Region
18. South Asia is one of the most vulnerable regions to climate change because of its
large population and degradation of natural resources. Extreme climate events - floods,
droughts, heat waves and unseasonal rains - have increased over the past century. As
per the estimates of the International Finance Corporation (IFC), between 2018 and
2030, the funding requirements for investment in renewable energy, greening the
vehicle fleet and making future building stock green and resilient to climate change risks
in South Asia alone would be over US$410 billion, US$670 billion and US$1.5 trillion,
respectively. Besides financing, access to technology and key minerals would also be
critical for successful green transition. Robust regional disaster management systems
could help in ensuring timely and effective response to devastating climate events. India
spearheaded the global initiative and launched a Coalition for Disaster Resilient
Infrastructure (CDRI) in 2019. Another initiative, the International Solar Alliance (ISA) in
partnership with the Global Energy Alliance for People and Planet (GEAPP) aims at
solarising the world. The South Asian region must strengthen cooperation to make
green transition of the region faster and at reasonable cost.
Promoting Tourism
19. Tourism is one of the major contributors to the GDP of some of the South Asian
nations such as Maldives, Nepal, Bhutan and Sri Lanka. As a sector, tourism is a huge
creator of employment. The entire region has rich untapped potential in tourism. In the
recent period, the tourism sector has somewhat revived in the region, but is yet to reach
pre-COVID levels. Intra-regional tourist flows also remain below potential. Regional
initiatives such as religious tourism circuits spanning countries that have common
historical and cultural footprint, adventure tourism circuits and medical/spiritual
/Ayurveda circuits can help boost the tourism industry and create a vibrant regional
value chain.
Conclusion
20. With the global trade outlook for 2023 overcast, greater intra-regional trade in South
Asia can enhance opportunities for growth and employment in the region. At the central
bank level, a key dimension of cooperation in the region has been learning from each
other on common goals and challenges, such as infrastructure financing, digital
financial inclusion, reducing the cost of cross-border remittances (by linking with UPI
system) and unconventional monetary policy, to name a few. Rupee settlement of cross
border trade and Central Bank Digital Currency (CBDC) where the RBI has already
started moving forward, can also be areas of greater cooperation in the future.
21. The book to be released today provides plenty of new ideas for forging cooperation
in the region and seeking solutions to common problems through right policy
interventions. I appreciate the efforts of the authors whose contributions made this book
possible. I do believe that the discussions during the day on policy choices will help us
in reshaping the future prospects of the South Asian region.
Thank you.
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Source: https://www.worldbank.org/en/programs/south-asia-regional-integration
/overview