Trump tariff opens opportunity for India, says World Bank’s Ohnsorge

Q. What is your assessment of Indian economy? A. The upgrade to 6.5 per cent for this fiscal year reflects strong data release, much stronger than we had anticipated for the last quarter. However, we do expect growth to slow down in part because of higher tariffs than we had anticipated in April. Still, India remains the fastest growing emerging markets. It is actually performing quite well compared to everyone else. Q. Because of tariff tension, what kind of growth you see in short to medium run? A. There’s actually an opportunity because the government is very keen on expanding trade opportunities. They’re negotiating now with multiple other economies for market access and bilateral trade agreements. Those go far beyond tariffs. They really can grant market access, which is what India has less than other emerging markets. So, for example, if you take Mexico and Vietnam, their trade agreement partners are 50 per cent of global GDP. That’s big market access. If you now add the UK, EU, Australia, Canada, the US, Indian trade agreement partners accounting for about 50-60 per cent of global GDP. That could be transformational. If all these trade agreements actually come to pass, if tariffs and intermediate goods are actually reduced to something more in line with others, like say half perhaps, that could truly transform the manufacturing sector in India. It could make a big difference. I see it as an opportunity more than a risk. Q. Do you have any policy advice for the government? A. Both AI and trade, they tend to be relative price shocks. They hit some sectors asymmetrically from other sectors. And the minute you have that, you need to move people and capital. Things need to move around. Factors of production have to move from shrinking to growing areas. If that process doesn’t work, it can be really painful. So what the government can do is to make it easier for that process to work, make the reallocation easier. For example, make it easier for workers to switch jobs and that is the labour market reform that they’ve passed already in the federal government, but now it needs to be implemented. Then there’s connectivity; you can live in one place and work in another. It’s skilling because skilled workers find it easier to shift jobs. It could be housing markets, make it easier for people to move to a different place to work there. These are the reform areas government is anyways working on. These would have a double dividend. Or they would interact with trade reforms to give you double the impact. We have actually done a general equilibrium modelling where we’ve got a trade reform that would be good for per capita incomes, it would raise them by an amount that could be comparable to what a similar model estimated for NAFTA’s impact on Mexico. Q. Keeping the theme of latest South Asia Development Update, jobs, AI and trade in the mind, how do you see employment scenario here? A. Employment divided by working age population has gone up since 2020, but of course, the data shows the biggest increase in agriculture. This is exactly why the World Bank now focuses on the jobs challenge. Around the world, and not just in South Asia, but also in the MENA (Middle East, North Africa) region, there’s a large number of people that are entering the job market in the next 15 years, and jobs need to be found. The good thing is, in India, there’s a lot of potential to actually employ them. Q. Does AI help the economy or takes away jobs, what is your assessment? A. Both are right. On balance, AI brings more opportunity than put people at risks. About 23 per cent of South Asia’s workforce is not even exposed to AI in any form because you have so much agricultural employment and manual labour. After 23 per cent, 15 per cent of the workforce are complementary to AI. They should benefit, they should have higher wages and higher productivity and only 7 per cent are substitutable by AI. In other emerging markets and developing economies, about 15 per cent of the workforce is substitutable. In South Asia, it’s only 7 per cent. On balance, AI brings big opportunities for South Asia especially India. AI skills in the South Asian labour market command a 30 per cent wage premium. This means the incentives to learn it are very strong. The government might not need to do anything, this is something that the market is sorting.