ITS been a little more than year since former ICICI Bank Chairman KV Kamath, took charge as the first President of the New Development Bank. In an interview to The Indian Express, Kamath says thought leaders must deliberate deeply on how to best utilise the Chinese overcapacity to the country’s advantage.
The world economy is still not out of the woods. You have been an eternal optimist, how do you look at the global economy today?
It is now clear — over the last two years — that the driver for growth is emerging economies, China, India, Africa. They will be the big contributors to global growth. Going forward, it will be countries such as those in Latin America and the CIS states which show the potential and also have the aspiration to growth. The contribution of developed countries will only reduce. This is dawning upon economic thought leaders the world over. In fact, China — which has seen the capital utilisation in some of its industries taking a hit — is the single-most important reason for the drop in commodity prices. Large capacities have been created in this part of the world i.e. China, and the world will have to find solutions to this. In fact, this aspect is clear in every single articulation by China’s leaders. This is the new normal, in other words. The world will have to find new ways and create sustainable industries to handle these excess capacities. All other global issues such as influx of migrants, Brexit, etc need to be seen in the economic context, where countries like China and India have become the new growth drivers.
What does the Chinese leadership mean when it talks about finding new solutions by the global system to handle overcapacity in its industry?
What they mean is that China created these capacities for rapid growth, and now the oversupply or overcapacity problem is a global challenge. They have not articulated it in as many words, but clearly, we have to draw inferences from their statements reading between the lines. Just to give an example, Chinese steel industry has a capacity of 900 million tonnes a year. In India, it is 20 million tonnes. And in the United States, it is 90 million tonnes. Last year, the Chinese steel industry’s capacity utilisation was 80 per cent. They cut steel production by 180 million tonnes. This is higher than the capacities of the US and India put together. Concomitantly, this has meant job losses in large numbers.
Does it effectively mean that the rest of the world has to absorb the excess capacities that China has created over the years?
Imagine the scope of the problem. China set up these capacities to grow, and it has achieved remarkable growth. How is the capacity best utilised going forward. They can supply material at most competitive prices to the rest of the world. How do other developing countries take advantage of this? Thought leaders in India need to think deeply about this. These materials can easily be accessed at low costs. We need to work on how to produce high value-added products, create more jobs at home, using some of this capacity.
With AIIB now being set up to fund infrastructure projects, how does the New Development Bank set up by the BRICS countries hope to carve a niche for itself?
If you look at various estimates of infrastructure needs over the next 10 years, the funds available including those from the entire multilateral development banking system, will hardly meet 10-15 per cent of the annual needs of growing infrastructure. The net absorptive capacity of multilateral development banks is a constraint, and they are a facilitator in this task of infrastructure development.
The challenges for multilateral development banks is to keep the effective cost of raising money low and funding in hard currency. For us, local currency funding is an imperative. We recently issued three billion in yuan-denominated five-year green bonds in July. In April, NDB had approved its first set of loans totalling $811 million.
The New Development Bank will launch its second bond issue in India. Then perhaps South Africa, Russia. The challenge is to factor in exchange rate fluctuation today over the life of the loan.
How do you view India’s progress over the last two years?
India has been on target in the near term. The Goods and Services Tax reform has been a big movement forward. There has been a lot of other work done, be in Make in India or the Ease of Doing Business. I would think that the foundation built over the last two years should provide the momentum to the economy in the coming years.