Question
The IMF last week presented its latest outlook for the global economy, Asia, and India, and all three growth rates have been upgraded. But, it was only October 15, just a few days ago. However, the news since then has been very disturbing on the price front, especially regarding crude. Now it looks like the average of $90 per barrel or $95 per barrel that economists projected for 2026 clearly has to be revised upward to a three-digit figure. Maybe $100 per barrel, according to some people, is here to stay for the next several months. In that case, do you think growth will suffer in Asia and India?
Answer:
Let me take a step back. If you look at Asia as a region, this is a highly energy-intensive region. Oil and gas consumption is about 4.5% of gross domestic product (GDP), twice that of the EU. And a lot of this oil is imported. Now, what we’ve seen in the context of this shock is that countries have adapted in three different ways. One, they have diversified where they get their oil from. Two, they’ve used measures to curb oil demand. And three, they have moved into things like renewables and so on. So, they have done this and that, in some sense. For example, China lowered its demand for oil. It brought down its inventories. So, did Korea, and so did Japan. So, the question you ask is: Given where we are with the war, what if China comes back into the market? What if other countries do as well? Is there an upside risk to oil prices? The answer is yes. So, what we say is that we have growth in Asia at 4.8% this year and 4.4% next year, but risks are significantly tilted to the downside. One of the risks we highlight is the fact that this oil shock could get worse before it gets better. So, in that sense, yes. However, the way we do our projections is based on our oil price forecasts at that point in time. We don’t build projections based on scenarios where conditions worsen, and that’s why we identify those as downside risks.
Question
Now, the unfortunate part for Asia and India is that we lie to the east of the Strait of Hormuz. So, while nations to the west have perhaps a few more options than we have, our dependence on the Strait of Hormuz is higher as well. Now those reserves will have to be replenished at some point, so the chances of a three-digit figure for the next several months are higher. So how do you look at inflation? For instance, in India, do you think our Lakshman Rekha is 6%? Do you think more rate hikes will be needed than you had originally pencilled in? How many, if any?
Answer:
At this point in time, we have inflation at about 5%. And, of course, our point is that price stability is a crucial objective for central bankers across the region. In fact, in our analysis, we talk about two things: inflation and debt. Clearly, price stability is something that has been enshrined, and central banks have been pursuing that objective. For example, if you look at Asia—the Philippines, Singapore, Indonesia, Thailand and India—some have loosened policy, while some have kept their policies unchanged. Given where we are today, if we see that oil prices are going to rise faster, and the second-round effects of this price increase manifest themselves in inflation or unanchor inflation expectations, then central banks have to be agile and tighten policy much faster. So, at this point, Latha, you would not be surprised when I say the key word is “data-dependent” because there are so many factors out there. You have to look at what’s happening, what’s driving the underlying factors. You have global factors and domestic factors. So, you have to look at everything to determine whether inflation is becoming an issue for India. Then the central bank can tighten policy faster.
Question
Crude is only one of the factors. The bigger problem that emerging economies in Asia face is rising global yields, especially US yields, and that’s not really only crude-dependent. There’s huge demand for capital from data centers and AI companies, and there is a very large government deficit. Governments also borrow. Now, the US 10-year yield is at 5.3%. The debate in India is now shifting on whether we can remain solely inflation-dependent as far as rate setting is concerned. Would you say interest rate support for the rupee may be called for sometime soon?
Answer:
I would say that, at this point in time, given the multiplicity of shocks we’ve seen over the last few years—and this may not be the last shock—you have to protect your buffers. You have to look at the macroeconomic fundamentals. In the context of India, I would say the central bank, like any other central bank, should be focused on price stability. I don’t believe that the exchange rate should be a barometer of economic success or failure. If the rupee moves significantly and that has a bearing on inflation and expectations, then there is good reason for you to tighten further. But otherwise, monetary policy should be focused on addressing price stability because that is its main objective.
Question
So, let the exchange rate absorb the shock.
Answer:
It has to be the first line of defence for any economy, especially when you’re an energy importer like India. But if the rupee moves significantly, and that feeds into inflation or inflation expectations, then you can say, “It’s not the exchange rate that I’m looking at; I’m looking at inflation.” In that context, central bank independence is extremely important. Let the central bank do its job. Its key mandate is price stability.
Question
India’s window of instability has largely been the rupee. Otherwise, the macroeconomy has done well, as your recent report acknowledges, and even upgrades the growth forecast. But it’s not a small factor. The rupee was previously a victim of higher current account deficits. Now, our current account deficit is actually at historic lows. Last year it was under 1%, and this year people are bringing down their forecast from 1.5% of GDP to about 1% of GDP. So capital flows are the problem. What is your sense? Do you think the India growth story can re-attract capital flows? What’s your thinking as an economist?
Answer:
The point I would make is that you’re absolutely right. We all thought the current account would widen a lot, and that would put pressure on the economy. What we’re seeing is a lot more capital outflows. If you look at net FDI, it’s close to zero. If you decompose net FDI into gross FDI, repatriation of investment, and new flows, what you’ve seen is that the amount of FDI going out of India is not inconsistent with the level of development of India. If you look at returns on investment in India, they are pretty much comparable to peers. What we do see is that there’s not enough FDI coming in. So gross inflows are not coming in strongly enough, and the question is why. India has to make itself a much more attractive place for investment.
Question
In this quarter, the gross flows have improved considerably. I mean, year-on-year growth is very good.
Answer:
So, I don’t look at just one quarter or one month. For me, that’s mostly noise. I look at more sustained patterns, and it’s important for India to do everything to attract FDI. Whether it’s sectoral caps limiting FDI, or whether an investor wants to come in and asks, “Okay, if I invest in this country, are tariff levels too high? Are non-tariff barriers too high? How do I do things?” These are the factors which will entice an investor to come and set up a factory here for many years. So, policy predictability and the continuity of policies—all of these are important. Yes, India has very strong fundamentals. It has maintained fiscal prudence. The fiscal deficit is targeted at 4.3%. Reserve adequacy is sufficient. Infrastructure investment has been good. Digitalisation has also been strong. So, there are many, many factors that are at work. But the broader point is to make India more attractive to attract FDI.
Question
Let me come to the US yields, which have been a bit of a bugbear for us. What’s your sense? Do you think the latest CPI and PPI numbers were also not very encouraging? They pointed to higher yields.
Answer:
Rising yields have gone up quite a bit. This reflects the fact that short-term interest rates are going to rise, and term premiums have also gone up in the US. If you look at the spillover to Asia, there’s been a 40-50 basis point increase, and that reflects a combination of benchmark yields going up as well as local factors. If you look at debt levels in Asia, excluding Japan, debt levels in advanced Asia are going to be rising. If you look at emerging Asia, debt levels are going to plateau, but at a very high level. So rising yields are going to make financial conditions tighter, more difficult, and more challenging. Debt servicing costs are going to rise. Debt sustainability is going to be a big problem. Now, countries which have buffers are better off. I would say India is in that category. But look at other countries in the region, which don’t have those buffers. They are not benefiting from the AI boom. They’re hurting from the energy shock, and they don’t have fiscal buffers. So those countries are at much more risk than a country like India. But the point here is that financing conditions, which were accommodative in the past, are going to tighten at a time when the energy shock hasn’t dissipated, and we have AI, which is also a two-sided risk.
Question
Now, I have a more immediate question. How have you analysed the impact of AI? Is it going to be rather severe, leading to huge job losses, especially in a country like India, which is about to reap a demographic dividend? Or will it also boost productivity without causing significant job losses?
Answer:
So, if I could just say one thing, the key message from this book is that we look at three transformations: demographics, technology—which is AI—and fragmentation or integration. The point we make is that, when it comes to demographics, there are three Asias. One has a young population, such as the Philippines, Nepal, and so on. Another includes countries where the population is ageing, such as India, Indonesia, and so on. And the third consists of countries with aged populations. So, there’s no one Asia; there are three Asias. But the point we make is that if productivity could increase by 0.8% annually, it could fully offset the drag from demographic ageing. Coming to your question about AI, we all have to be a bit humble about it because we know much less. We don’t know much. It’s a new phenomenon. But in some of the analysis we have done for another publication, we looked at what has happened to labour demand since ChatGPT was launched in 2022. What we find is that demand for labour in jobs exposed to AI, relative to jobs less exposed to AI, has come down by 10%. But people should not focus only on the 10%. What we find is that this decline has stabilised. The point is that, if people are willing to embrace AI and have the skills, then employers are willing to hire them. So, it is about reshaping the labour force, not displacing workers. Again, these are the initial stages, and we are doing more work on this. But the point I would make is: don’t be too pessimistic because the evidence we see in Asia—at least from this first study on Asia—is that it’s more about reshaping the labour force than displacing workers.