Neelkanth Mishra, Executive Director, World Bank, on India’s growth ambitions, the disruption AI could bring to education, private sector’s investment appetite and the rupee’s road ahead. The conversation was moderated by Aanchal Magazine, Deputy Associate Editor, The Indian ExpressAanchal Magazine: You’ve recently been appointed Executive Director at the World Bank, making you one of India’s youngest representatives at the institution. Coming from the private sector, what do you plan to do differently in your new role?Private or public sector, there are three aspects to the role. First is the role of an ED at the World Bank: board-level deliberations and issues affecting World Bank policies. The Bank itself is in transition. Its role has to be rethought, and new president Ajay Banga is restructuring it.The second role is that of a facilitator. The World Bank’s engagement with India now needs to change. The Indian financial system is much larger — non-government financial credit is now $3 trillion, growing 15 per cent a year. We’re generating $450 billion of credit. Add venture capital, private equity, IPO markets and retained corporate equity, and the World Bank’s $2-5 billion is far less significant than it was 20 years ago. Executive Director – World Bank, Neelkanth Mishra. (Photo by Renuka Puri)The cost of capital has also changed. There was a time when US government bonds yielded 2 per cent and India was at 8 per cent, making World Bank capital cheaper even after hedging. That’s no longer the case. The US 10-year bonds are at 4.7 per cent and India at 6.7 per cent. After hedging, the risk-free rate in India in rupee terms is no longer viable.The big opportunity is the World Bank’s expertise. There are market failures in India — areas where we want to solve problems but need to bring demand and supply together — such as tourism and urbanisation. The World Bank’s experience in developing tourist hubs and supporting urbanisation in large countries, including China, is something we can tap into. So, there is demand, supply can be brought into the pipeline, and trust and understanding can be built on both sides.Third is to improve or work on India’s image in Washington DC. So, from the limited time I have spent there, it seems the image of India is still of what India was 15-20 years ago. So, there is a lot of work that needs to be done in terms of just making people aware of what India has achieved in, say, semiconductors, digital public infrastructure, and urbanisation — where there is a long way to go. But there are many positive things happening in India. As a younger person, maybe I can bring in some more energy in driving all three.On changing India’s image in DC | It seems India’s image is still what it was 15-20 years ago. A lot of work needs to be done in just making people aware in Washington DC what India has achieved in, say, semiconductors, digital public infrastructureStory continues below this adAanchal Magazine: As capital flows remain a concern, what is the India story we are trying to sell to global investors and where are we lagging?I don’t think it is that bad. This is a problem everyone is facing. Anyone dependent on foreign capital knows its cost has gone up because the setter of the global risk-free rate is now fiscally indisciplined and 10-year yields have risen.In India, even though net FDI (Foreign Direct Investment) is slow, gross inbound FDI is still going up. India is reaching a stage where some companies are so large that the only way to grow is outside India. So outbound FDI is also picking up. When you put all of this together, sustaining 1 per cent of GDP of current account deficit is also a strategic choice. Our choice used to be 2-3 per cent; that may be hard to execute now. Therefore, I think some of the amendments, ordinances, and the fact that we have now opened up a lot more to foreign bond funds are important. Maybe the area where a lot of investment needs to happen is urbanisation and private capital mobilisation, which is also a World Bank priority. We need to absorb the fact that the global environment has changed… We have to think like a proper power: everything is not about us and that people don’t like us. It is a reality that this is how water flows; the gradient is not good enough, let’s try to make it good enough. Neelkanth Mishra, Executive Director – World Bank (right) in a conversation with Aanchal Magazine, Deputy Associate Editor, The Indian Express. (Photo by Renuka Puri)Aanchal Magazine: Is there a flip side to getting so much foreign money as Foreign Currency Non-Resident (Bank) deposits?Story continues below this adThis has many different aspects. The first is that if you are running a current account deficit, it means that you consume more than you produce and you are taking on liabilities, whether it is FDI or global bond investors buying Indian bonds — capital inflow is a liability, it will go back. It’s the duration and the cost that matters. When you get a large amount of money through private equity and venture capital — which is great because it is very high-risk capital and we need that — if it is successful, the effective cost is 15 per cent. If you allow capital to come in at 6.7 per cent interest, if the FPIs (Foreign Portfolio Investors) are buying Indian sovereign bonds, or 6.5 per cent on FCNR(B), what’s wrong with it? Now, will there be an outflow three-five years later? We will do another FCNR(B). So, it’s a strategic choice: you need capital to fund growth.On India’s growth & jobs challenge | I don’t think we will be able to create all the jobs we need to. To create jobs for everyone, it will require us to grow at 10 per cent in real terms. Should we try to do that? We should. But is that realistic? I don’t think soThe second aspect is the currency. Currencies usually have no anchor because in any other security, whether bond or equity, you have earnings, coupons, or some collateral. But currencies can be viciously volatile. The rupee is at 95 per dollar; it may not be the ideal level; my view is that the USD to INR should be lower. But my view does not matter. If people see it stabilising at 95, then the importer will say, ‘kyu hedge karein’? Over time, the hedging demand goes down, and suddenly you start seeing the reverse, which is that surplus dollars are coming. Some of that has been hidden by the fact that RBI’s forwards have been unwound. Once it starts becoming visible, the panic will subside and the rupee will find its own level. When you have a run on the currency, you have to give a shock to the market and say, look at this, we have $100 billion. Then people back off.Aanchal Magazine: Where do you see the rupee finding its level in the near future?Now that the firepower is there, the rupee can stabilise. Remember, the West Asian conflict is actually at a precarious stage right now. Both sides are starting to get restless because there is a cost to be incurred. So, if it flares up before it comes down and oil prices go up significantly from here and if in that desperation someone damages some energy facility, then there are serious issues. So, that’s my only worry. Otherwise, I think we are in reasonably safe territory.Story continues below this adMy sense is that sometime in the next two-three years, the dollar has to depreciate significantly… and people will be hunting for other assets. And this is a deep vulnerability we have: when the dollar starts to fall, gold prices will skyrocket. Indians are now wealthy enough to start speculating in that. So, demand for gold imports will skyrocket at that time; we need to be prepared for that, we need to have the investment products which do not pressure the balance of payments. Neelkanth Mishra, Executive Director – World Bank (right) in a conversation with Aanchal Magazine, Deputy Associate Editor, The Indian Express. (Photo by Renuka Puri)P Vaidyanathan Iyer: The jobs problem is becoming more pronounced. India is growing at 6-8 per cent but a large number of young people are entering the workforce. There is a continuing debate over whether services or manufacturing can create enough jobs. How do you see this challenge being addressed, particularly over the long term?The post-COVID recovery is not yet complete. We can debate it, but we are about 10 per cent below our pre-pandemic path. Only the US is, I think, on its pre-pandemic path or slightly higher because of fiscal indiscipline. The assumption that we are not creating jobs is wrong; are we creating sufficient jobs is the question. If 7 per cent growth is happening, it’s not that labour demand growth is zero and everyone is becoming 7 per cent more productive. So, jobs have been created. Real estate sales are doing very well. So clearly construction is happening. But there is slack. And as the slack happens, pricing power goes down, inequality goes up. The bigger question is: will we be able to create sufficient jobs in the next 10, 15, 20 years? Because that’s a period of demographic dividend. I don’t think we will be able to create all the jobs that we need to. So, if you add the hidden unemployment in agriculture and the underemployment in the female labour force, we can’t find jobs for them. So, if you want to create jobs for everyone, that will require us to grow at 10 per cent in real terms. Should we try to do that? We should. But is that realistic? I don’t think so.Aanchal Magazine: How do you think India’s education system needs to evolve?Story continues below this adMy slightly controversial take on education is that it is more a signalling tool than a skill-development tool. On skilling and education, AI will revolutionise access to skills and education. You don’t need a good teacher. I remember taking the JEE 33 years back; we never got some of the books in Bokaro, and I used to envy people in Mumbai and Delhi who could get them easily. Today, PDF copies circulate everywhere. You can ask Gemini. My son is doing mathematical Olympiad problems and when he can’t solve them, he asks Gemini. This is a huge democratisation: you don’t need a good tutor; if you are enterprising enough, you can solve these problems.On India’s energy vulnerability | We are deeply vulnerable to global energy market volatility. We have to solve this. Some technology shifts are helping. But that vulnerability will remain for the next 10-12 years. I am hopeful that it will not become a constraintThat’s what we need in India, where state governments struggle with teacher attendance and quality of pedagogy. You also have the low-income trap, where the poorest states have the least money to spend on education. The World Bank has argued that AI can significantly enhance state capacity, and education is a primary element. Which is why I think education will get disrupted. How exactly, I don’t know, but I am very hopeful that this will help solve many of the problems we have been stuck with. Executive Director – World Bank, Neelkanth Mishra. (Photo by Renuka Puri)Sandeep Singh: What is the one fault line in the economy’s growth?It’s energy prices and availability. No large economy in the world, in history, has grown to prosperity without controlling its own sources of energy. And we are deeply vulnerable to global energy market volatility. We have to solve this. Some of the technology shifts are helping in that direction. But that vulnerability will remain with us for the next 10-12 years. I am hopeful that vulnerability will not become a constraint.Story continues below this adThere are other things, like political consensus on growth. Right now, everyone wants to grow and that’s a very welcome trend. I see that within the government and the economy: social acceptability of wealth creation. That consensus is generally very fragile and we need to actively monitor it, because the moment that consensus breaks, it shifts to what New York is seeing now.Siddharth Upasani: The Chief Economic Advisor has said that wage growth has not kept pace with private sector profit growth. A new paper by the Economic Advisory Council to the Prime Minister has said firm level investments have not kept pace with profits. Why is the private sector sitting on cash?There was a period when people were selling stakes in their own companies because stock prices were so high, and deploying it back into the stock market. They were diversifying. That’s not entrepreneurship. These family offices were doing what I call lazy investments. Now, that easy money is gone. So, you are seeing Indian businesses diversifying into businesses with high return on capital, like paints, glue or jewellery. Everyone has their own risk appetite. Once the data centre business model became slightly more attractive, everyone made a beeline for it.Let the surpluses accumulate. India’s entrepreneurs will not invest because we ask them to; they will invest when they see the opportunity. One reason cash has been accumulating is that companies were deleveraging because of the scarring of 2016 and the policy shift that happened. The Insolvency and Bankruptcy Code of 2016 was a transformative event where large companies found that they could lose assets and control of their businesses. It affected their willingness to take on debt. Once you’ve repaid the debt and are sitting on cash, you’re not just going to issue dividends; if you have entrepreneurship left, you will set up new business lines. So, I don’t see it as a structural problem. It takes time and we have to stay patient.Story continues below this ad Executive Director – World Bank, Neelkanth Mishra. (Photo by Renuka Puri)Sandeep Singh: What about the long-term stock market investor who has seen his money not move at all for the last three years?On some measures, the equity premium got negative in 2023. The market was so expensive that it seemed stocks were less risky than government bonds — that’s absolutely unsustainable. So, I had said (back then) that there’s going to be a significant period of time correction where earnings keep going up, but the stock market still stays there, the PE multiple drifts down, and then it becomes suitable because equities are a risky asset class. I think we are still going through that.Will it continue for a very large period? I don’t think so. My view is that the economy is doing very well. Profit-to-GDP ratios don’t move around beyond a certain band; right now, they’re a bit elevated, but even if they come down, I think earnings growth will be high single-digit or low double-digit. In which case, the stock markets over a five-year period will give decent returns. That’s how I invest my own money.Deeptiman Tiwary: In an atmosphere of stagnating income and rising cost of living, consumption is being sustained by debt. Is consumption going to be sustained by a critical mass of people who have created enough wealth to sustain demand in the long run?Story continues below this adI don’t agree with the assertion that consumption is being boosted by credit. Yes, there is clearly some boost that has come from that. But if you look at retail credit growth and then look at consumption growth, you’ll find that it’s like a rounding error. So, I don’t think consumption is being boosted by credit.At this stage of development, labour is in surplus, capital is in shortage. So, there is an inevitable rise in inequality at this stage. There are ways to address it, if we can democratise access to capital.Aanchal Magazine: What are the next reforms being planned for Aadhaar 2.0?We have done a number of things and some of them are still underway. The first is the Aadhaar app. Over the last three years, we have completely redesigned it. We now have more than four crore downloads. We are trying to get the flywheel moving so that people don’t need to carry the Aadhaar card. There are a lot of services we have made available: address change, phone number change, face authentication — you can do all of that. Second, we were seeing a lot of discomfort with the Aadhaar Seva Kendra and the service quality. So, like Passport Seva Kendra, we are ramping up private sector-run (Aadhaar kendras). We had an RFP, we identified the vendors, and 700 of these private Aadhaar Seva Kendras have started now. We also started a process of diligent monthly reviews on operating parameters. There was a point at which the pending packet was one crore. Now, courtesy of the previous CEO, we have managed to bring it down to 5 lakh.We have brought in agile computing, so that visibility of the organisation, the time it takes to drive projects, the ease with which the authority can review and see operating metrics, all of those things are happening.