“Gita Gopinath, the IMF’s first deputy managing director, is in India and discussed various topics with TOI, including the global crisis, AI, and the need for job creation. Here are some excerpts:
How do you see wars and crises affecting the world and India?
In recent years, there’s been a significant increase in geopolitical uncertainty due to events like the Russian invasion of Ukraine and conflicts in the Middle East (West Asia).
More generally, nations have reconsidered what the proper terms of engagement should be in light of the pandemic and the conflict. It is not only motivated by efficiency; resilience and worries about national security also play a role. In terms of global integration, this is a totally different world than the one we have been living in for the past three decades.
“In the short term, the energy crisis caused by the war and food insecurity have led to a much higher cost of living in many countries. If these conflicts continue, we might see further increases, like a rise in oil prices, which could negatively impact many countries, including India. Another factor is the uncertainty that comes with it. We’re in an election year, which brings a lot of uncertainty regarding policies, and that can make investors hesitant.”
Trade fragmentation is a major concern. In 2022 and 2023, around 3,000 new trade restrictions were implemented. We’re seeing many countries introduce industrial policies that include trade-restricting measures. Countries that are close geopolitically are maintaining stronger trade ties, while those that are distant are facing challenges. We’re still in the early stages of geo-economic fragmentation, and if this continues, the risks could become much more severe, where no one benefits.
Will it be harder for countries like India to grow quickly, given that China, Korea, or Japan have better conditions?
Trade has been a key driver of growth for many countries. However, there’s now a strong push for reshoring production, which affects how developing countries can benefit from trade. As a result, countries are looking for more trade partners to diversify. Focusing solely on one trade partner is now seen as risky, which creates opportunities for countries like India, as it’s viewed positively as a trade partner. India and other nations must maintain a well-functioning, multilateral-based system.
India is performing well in terms of economic growth. But is the country getting too caught up in the growth hype? India is indeed doing well with growth rates. This year, growth is projected at 7%, with medium-term growth expected to be around 6.5–7%. India’s contribution to global growth is 17%, making it one of the fastest-growing major global economies. However, to achieve even higher growth and maintain this momentum, a strong reform agenda is needed, which the government is working on.
What would be your recommendations for the reform agenda?
The 7% growth isn’t leading to enough job creation, and this needs attention. In terms of private investment, while it’s strong in the household sector and real estate, investment in machinery and equipment isn’t as robust.
First, focusing on improving the ease of doing business by reducing regulatory hurdles and red tape will be very beneficial. We’ve studied where foreign direct investment (FDI) in India is going, and states like Gujarat and Tamil Nadu, which rank well in terms of business climate, stand out.
In the near term, labor market flexibility is crucial. Although new labor laws were approved by parliament in 2020, they need to be implemented, which requires regulations at the state level and incentives for states to put these laws into practice.
India’s tariff rates are higher than those of its peers. If India wants to be part of global supply chains, it needs to make importing and exporting more cost-effective. Without this, attracting investment to the country will be challenging.
When it comes to foreign direct investment (FDI) in India, there’s a lot of interest. For example, announced projects are valued at around $80 billion. India’s efforts to reduce trade restrictions will help attract this investment. Additionally, the government has done well by investing in public infrastructure, both physical and digital. However, India still needs much more, and the budget has allocated extra funding for public investment.
Looking at the medium term, improving education and skills, including digital skills, will be crucial. Agricultural sector reforms will also be important.
What are your thoughts on the policy of incentivizing the private sector to create jobs?
Incentives are certainly helpful and have been tested before. The employment-linked incentive included in the budget addresses this issue. However, it’s important to eventually conduct a cost-benefit analysis. We’ve analyzed the numbers and estimated that between 60 million and 148 million additional jobs will need to be created by 2030. Achieving this level of job creation will require broad-based reforms.
How significant is the challenge posed by artificial intelligence (AI), and how will it impact future job creation? Some have suggested a robot tax to create a social security buffer.
There are, indeed, risks. AI, like any general-purpose technology, has the potential to boost productivity, which is generally positive for jobs and overall economic growth. However, because of the nature of this technology, there is also a risk of displacing workers. There’s a lot of uncertainty regarding the impact, with some estimates showing minimal effects and others predicting significant disruption. The impact will largely depend on how quickly AI is integrated into the economy.
In our study, we found that about 40% of jobs globally are exposed to AI. This doesn’t necessarily mean it’s negative—about half of these jobs could be enhanced by AI, while the other half might be replaced. So, the effect could be substantial, depending on how the technology evolves.
Regarding taxation, policymakers should closely monitor how AI is developing and being adopted, as it will have widespread implications. There’s a need to address the regulatory aspects, ensure the technology is used ethically, and maintain respect for data privacy.
The idea of an AI or robot tax depends on the details. Our view is that there shouldn’t be a specific tax on robots because we believe in promoting efficiency and productivity. However, governments need to review their tax structures. Sometimes, without realizing it, tax policies might unintentionally encourage automation over hiring workers. We’ve analyzed this and found that in some countries, especially advanced economies, the tax system tends to favor automation rather than labor.
Can a billionaire tax or wealth tax help address inequality?
The IMF supports a progressive tax system. We believe that improving the enforcement of existing taxes on capital income and property could be very effective. Wealth taxes, however, come with additional challenges. For many people, their wealth is primarily tied to their home, which complicates implementation. But if capital income taxes are managed well, they can be quite effective.
Would you recommend a universal basic income for a country like India?
If you make a universal basic income truly universal, it means giving it to everyone, which can be very expensive for countries. You either end up giving everyone a very small amount, which doesn’t have much impact, or you give a meaningful amount, which requires a large sum of money, making it a significant fiscal burden. The better approach is to target it more effectively, as many countries do. We’ve observed that when you increase the generosity of unemployment insurance, it can have a more targeted and impactful effect.
