Roberto Zagha Speaks to The Economic Times of India

Roberto Zagha, World Bank country director in India, who has closely watched India usher in reforms in the '90's, expects them to get bolder. Zagha says double-digit growth may be feasible with some small steps. Excerpts from the interview:

Will India now remain in this 6%-7.5% growth bracket?
The Planning Commission and the prime minister have said several times that India can grow by 10%. I think this is feasible. India has a savings rate in excess of 33%, and a high investment rate. So, with the right policies, it could grow significantly.

India has an abnormally small manufacturing sector, but a highly diversified and competitive one. If you look at Bihar and Orissa, agriculture has huge potential. You need roads, water and better farm infrastructure to realise that potential. Low inflation, a sophisticated financial system and a competent bureaucracy are the other important assets. Coal is an interesting story. During 2003-05, several captive licences were given, but today there is shortage of coal in the country. If captive mines are allowed to sell in the domestic market, you could have a boost in coal production and also in power.

So there is an inherent dynamics that can be easily unleashed. Whether the growth is 7.5% or more, it would depend on how these issues are dealt with. In India there are easy gains if they go after those low hanging fruits.

Analysts say growth has fallen prey to policy paralysis?
To begin with, 7.5% growth is not bad. With 7.5% growth you can more than double your GDP in 10 years. In some respects, I find it extraordinary that India is considering 7% growth as bad. In 1995, 5% was wonderful and 6% was like a mirage. China is also growing at a slower pace. Can you say that they have also lost it?

Structural challenges that you face are not easy technically or politically. China was growing so fast that its trade surplus reached 10% of GDP. It was unbalancing the world economy. China has corrected that. It has brought down its trade surplus. But to do that, it had to increase consumption, and inevitably growth seems to be suffering. Coal in India happens to be in forests, so they have a value. There are people living around... tribals. The challenge is to ensure that everybody sees a gain in the growth, and that is not easy.

Do you think a slow pace of growth could come in the way of bold reforms?
I am not a politician and I don’t know how they make calculations. In some respects, if growth slows down, it may create a sense of urgency for bold reforms. On the other hand, it is possible that if growth slows down, the government loses legitimacy and the backing for bold reforms. I don’t know how these things play out. But in 1991, when I was working here, everybody during the Narasimha Rao government was saying he would not stay as he was a caretaker and reforms would suffer. Then six months, 12 months, 18 months and two years and five years, India was transformed without a majority in parliament. The country seems allergic to high inflation. For many years, India was tolerant of low growth but allergic to high inflation. We now seem to have entered a phase where India is both intolerant of high inflation and intolerant of low growth. And so, if this is correct, then you can expect reforms to be emboldened.

How does one tackle the issue of land in infrastructure development?
The possible solution will have two or three ingredients. One, the price of land in India is artificially high. The people to land ratio, too, is very high and that creates some pressure. But it’s also high because of curbs on conversion of farmland. The second is the voracious urbanisation process with FSI and density restrictions. All Indian cities tend to spread more than what is necessary because of density restrictions. The more you spread yourself around, the less you have in terms of productivity gains. Tight rules in land conversion create scarcity for the purposes of land acquisition. The third is the compensation system.

If you are a farmer, you are not allowed to sell to an industrialist. If the government acquires it, then under the Land Acquisition Act it goes up in value 10-15 times, but you do not benefit from it. It may not be fair to restrict farmers from selling to whomsoever they want. So there are not enough market systems in the land markets. The bill tabled in Parliament says that it would be market linked, but there is no market here. How can you know what the market is when there are no transactions? But again, it is not something that you can do overnight. Since infrastructure generates a lot of value and land conversion generates lot of value, it makes sense to have better sharing mechanisms. But in the medium to long term, you need to have better land markets with better systems.

This interview was originally published in the Economic Times on 15 March 2012