Speech by ADB President Takehiko Nakao on 3 May 2013 at the India Day: "India—Next Wave of Inclusive Growth".
Honorable Minister of Finance, Mr. Chidambaram; Dr. Mayaram; Ms. Kidwai; and distinguished guests: good afternoon. I am very pleased to be here with you today to discuss a question of critical importance: What should India do to unleash the next wave of inclusive growth?
In my remarks, I wish to convey three messages. First, inclusion must be driven by the creation of good jobs. Second, addressing the country's infrastructure requirements is essential. And third, strategic investments in infrastructure designed around high-priority economic corridors—both domestic as well as regional—present an unprecedented opportunity for unleashing the next wave of inclusive growth.
Jobs and inclusion
First, jobs and inclusion, as stated in the government's latest Economic Survey, “a good job is the best form of inclusion”. In creating good jobs, better business environment and development of the workforce's skills will play a defining role.
Improvements in the business environment are vital, especially if India is to realize its potential in manufacturing. A better business environment with fair and predictable rules and regulations will attract private investment, unlock entrepreneurship, expand business activities, and thus create good jobs. India has to reduce regulations to allow its vibrant service sector to be more competitive and dynamic, and to shift toward modern services such as information and communication technology, finance, legal, and other professional business services.
It is true that India possesses some of the world's best managers, scientists, and engineers, but a large portion of its workforce is unskilled or semi-skilled.1 In this context, I am happy to see the unfolding of the National Skills Policy. The policy marks a paradigm shift from the traditional government-led model of skill development and vocational training to one which emphasizes private sector-led skills development.
Considering India's young and growing labor force, India needs to create more jobs for the millions who will join the workforce every year through better business environment, and skills development.
Addressing India's infrastructure needs
Let me turn to the second point of India's infrastructure needs.
India's 12th Plan notes that about $1 trillion investment in infrastructure will be needed during the fiscal years 2012-2016 to meet the country's goal of high and inclusive growth. For instance, as India urbanizes, efficient, multimodal transport systems and high quality power will be crucial, together with other infrastructure including water supply, sanitation and housing. In rural India, better water resource management, post-harvest infrastructure for high-value-added agriculture, power, and transport connectivity are key for improving agricultural productivity and expanding opportunities in the nonfarm sector. Infrastructure needs in India is indeed enormous.
The most fundamental challenge in infrastructure development lies in financing the needed infrastructure investments. The share of private investment in infrastructure needs to increase from 38% during fiscal years 2007-2011 to about 48% during fiscal years 2012-2016.
Commercial banks in India are already reaching their lending exposure limits for the infrastructure sector and are facing asset-liability mismatches. The government should push hard and fast on recent initiatives such as creating a vibrant bond market, including for infrastructure bonds, using Infrastructure Debt Funds2 to refinance short term bank debt with long term debt, promoting take-out financing, and introducing guarantee products for credit enhancement of infrastructure bonds.
In this context, I am pleased to note that ADB is collaborating with the India Infrastructure Finance Company Limited (IIFCL) to establish a partial credit guarantee facility that would boost the credit ratings of an infrastructure project and make it eligible for insurance and pension fund financing. This is a first of its kind in India and could potentially create a new market.3 More such innovative initiatives are needed.
Investments in economic corridors and regional cooperation
Let me turn now to the third point, economic corridors.
Economic corridors are much more than a collection of points along a highway or a railway line. They are a means of integrating and connecting centers of production and demand and creating income opportunities all along their paths.
The Delhi-Mumbai Industrial Corridor, or DMIC, for example, is expected to double employment opportunities in 7 years while tripling industrial output in 9 years. The time is now right to plan for economic corridors in other parts of the country. To realize their full potential, economic corridors must also be part of broader regional economic corridors and regional integration efforts.
Domestically and regionally integrated economic corridors hold much promise for South Asia in general. Only 5.4% of South Asia's trade is intra-regional, compared to 51% in East Asia. Major barriers for intra-regional trade in South Asia include poor transport connectivity and non-tariff barriers. In this context, I am happy to note that with strong support from India, the South Asia Subregional Economic Cooperation Program (SASEC) has had significant successes in prioritizing regional road and rail projects in Nepal, Bhutan and Bangladesh and India, and agreeing on a time bound investment program.4
Ladies and gentlemen:
India is expected to continue to benefit from the so called demographic dividend and to lead global growth in coming decades. Everybody sees great potential in India. Given the inherent dynamism of India's private sector, better infrastructure and timely reforms on key issues will open the door to a great future for the people of India.
ADB is proud to be a partner to India in its quest to unleash the next wave of inclusive growth. I assure you of our continued partnership in every aspect of infrastructure development—from investing in core infrastructure projects and building skills and capacity, to piloting innovative financing mechanisms and developing vibrant economic corridors that integrate India's economy domestically and regionally.
1. 57% of India's youth suffer from some degree of unemployability. Graduates constitute only 7% of the 15 to 60 year-old working age population. 40% of this cohort is illiterate. Only 52% of those who pass the secondary level enroll for higher education. While 90% of the employment opportunities require vocational skills, India's education system continues to focus on rote learning. Moreover, recent surveys show that only 30% of India's IT graduates, 25% of engineering graduates, 15% of finance and accounting professionals are suitable for employment.
2. The Finance Minister had in his budget speech for the year 2011-2012 announced the setting up of Infrastructure Debt Funds (IDFs), to facilitate the flow of long-term debt into infrastructure projects. IDFs can be set up either as a trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) that would issue units, while a company based IDF would normally be in the form of a Non-Banking Financial Company that would issue bonds. Investors would primarily be domestic and off-shore institutional investors, especially Insurance and Pension Funds which have long term resources. By refinancing bank loans of existing projects, the IDFs are expected to take over a fairly large volume of existing bank debt. The IDFs will also help accelerate the evolution of a secondary market for bonds, which is presently lacking depth.
3. India has a large insurance and pension funds. However, these funds have not been utilized for financing infrastructure; a chief constraint being that the statutory requirements require that these funds invest only in assets rated AA or above, while infrastructure sector bonds are typically rated BBB– to A, at best. To bridge this gap, ADB's Private Sector Operations Department and South Asia Department joined hands with IIFCL to develop a credit enhancement product. The product provides credit enhancement in form of first loss guarantee to infrastructure project bonds raising their rating to the required AA rating thereby allowing the mobilization of financing from pension and insurance funds. Under the facility, IIFCL (or other domestic AAA financial institution) will provide the credit guarantee and ADB will risk participate for up to 50% of the underlying project risk. ADB proposes to assist in the credit enhancement of 3-5 project bonds to pilot the credit enhancement concept across the market.
4. Specific projects include (i) road and rail connectivity investments in West Bengal, especially in the chicken-neck area, and in North East India that would foster South Asia's links to South East Asia and ASEAN; (ii) soft infrastructure support to reduce non-tariff barriers in the region; and (iii) critical infrastructure to develop a robust regional power grid and expand common regional energy markets.