‘Easier to get FDI inflows than portfolio funds to India now’

He also said that up to 56 million “additional people” were pushed into extreme poverty in India during the covid pandemic, and that the increase in commodity prices in 2022 has hit poor households relatively hard one again.

In an emailed interview, Timmer said it will remain difficult for India to attract foreign portfolio investments (FPI) in the foreseeable future and with heightened global uncertainty, dollar dominance will likely continue. Edited excerpts: 

The World Bank in its latest report has lowered India’s economic growth forecast for the third time, and very sharply to 6.5% for 2022-23. How much of the slowdown do you attribute to global factors and how much to domestic factors? 

We slightly upgraded GDP growth for 2021-22 and sharply downgraded GDP growth for 2022-23. The downgrade is partly the result of the stronger-than-expected rebound in the previous year (it is more difficult to grow from a higher starting level). More importantly, we currently see a weakening of domestic demand, especially of investments. This coincides with a global deterioration of business sentiments and with capital outflows from emerging economies, including India, because of rising interest rates in high-income countries. So, in that sense it is very likely that the weakening can be attributed to global factors. Exports (especially exports of services) have not weakened substantially in our forecast.

Has inequality in India increased more than in other major economies post pandemic?

It is difficult to get up-to-date information about inequality in India and thus it is difficult to assess whether inequality has increased more than in other economies. But the most vulnerable people have been hit hardest by the shocks. That was true during covid-19 when poor people in the informal sector had no opportunity to socially distance and had less access to health care. At the same time, many domestic migrants lost their job and returned to rural areas. We estimate that this has led in 2020 to between 23 and 56 million additional people in extreme poverty in India. In the following year, roughly half of them could escape extreme poverty again. But the increase in commodity prices in 2022 has hit poor households again relatively hard.

Do you foresee any risks and challenges around the RBI’s CBDC?

CBDCs are a new form of central bank money and share many commonalities with traditional central bank money. It allows the central bank control over digital payments and can promote financial inclusion if well-implemented. The introduction of CBDCs could disrupt the existing financial-intermediation structure; it could pose risk to financial stability and data privacy; and it could have implications for the legal and regulatory frameworks, potentially leading to currency substitution. The RBI plans to launch both a wholesale CBDC (inter-bank transfers) and retail CBDC (electronic cash). A comprehensive stress testing (as the RBI is planning) is essential, especially for the retail CBDC. RBI’s graded approach can help identify risks before a full launch.

How do you perceive capital outflow risks for India this year? What is your outlook on the dollar? 

We have already seen capital outflows and for the foreseeable future it will remain difficult to attract foreign portfolio capital. However, it should be possible to attract more FDI (foreign direct investment), especially in the new services economy. Depreciation of the rupee depends on the situation in financial markets but also on domestic policies. Continued large fiscal deficits (and resulting current-account deficits) and too loose monetary policy would increase the risk of depreciation.

With the heightened uncertainty, dollar dominance will likely continue. Further appreciation of the dollar will lead to continued problems for countries with exchange rates pegged to the dollar. Their own monetary policy will find it difficult to defend the peg.