India, one of the fastest growing developing countries, which is fairly well-integrated with the rest of the world through both trade and capital flows, has a high stake in global recovery in the short run and global governance in the long run. This column discusses India’s immediate and long-term concerns and explores what needs to done in the medium term for more inclusive global development.
India’s expectations from the G20 process
Over the past two decades, India has become increasingly integrated with the global economy. As the process of integration with the rest of the world gathers pace, India’s stake in orderly global governance, the creation of a better environment for trade and investment flows and sustainable development will increase. India’s concerns, as voiced repeatedly by the Indian Prime Minister, the central bank governor, and the Sherpa, include the following:
- Rebalancing global governance by reforming global financial institutions
- Reforming the global financial and monetary systems to provide better financial safety nets
- Checking global macro imbalances
- Ensuring lines of credit and export finance to developing countries
- Checking any protectionist measures and
- Widening the current agenda to include developmental issues
The G20, true to what was expected of it, managed to forge coordinated counter-cyclical fiscal and monetary policies in the wake of the crisis. However, a number of structural issues such as persistent deficits/surpluses, loopholes in financial sector regulation, growing trade and financial protectionism, and consequent disagreements that undermine the willingness to cooperate further threaten the very existence of the group. The G20 has to address the following issues to stay relevant.
- The immediate challenge is to implement what has already been committed in the previous summits. The G20 Toronto Summit Final Compliance Report states that the commitment is in general weak and needs considerable attention. In particular, compliance by the non-G8 members, including India, is weak.
- Barry Eichengreen (2009) points out that the fundamental difference between the advanced and emerging economies in the G20 arises from the insistence of advanced countries that emerging markets should stimulate demand to rebalance while emerging markets insist on building up foreign reserves as an insurance against volatility in capital flows. Though the G20 has made considerable progress in persuading the IMF to provide a line of credit and relax conditionalities, developing countries still rely on their own reserves rather than on institutional funding. It is imperative for the G20 to convince emerging nations of its commitment to provide global safety nets.
- The fear that more and more advanced countries will resort to quantitative easing as fiscal measures are exhausted is beginning to gain greater credibility. However, the G20 should collectively resist quantitative easing as it is unlikely to be a solution to the problem and may, indeed, prove harmful.
- First, it would not help boost demand in the advanced countries as there is already enough liquidity available in many of these countries.
- Second, cheap money would flood the emerging nations where maintaining the exchange rate, export competitiveness, and independence of monetary policy in general would become increasingly difficult. Instead, advanced countries should be encouraged to take advantage of lower interest rates in the long-term bond market to finance public investment that has a high multiplier effect and to concentrate on structural reforms, such as labour and tax reforms, for better productivity.
- India’s concern with Basel III is that though it brings stability to the banking sector across the world, the stringent capital buffers proposed would be detrimental to the interests of developing countries. High buffer requirements as a counter-cyclical measure would translate into higher lending costs and thus would hurt economic growth. Reserve Bank Governor Duvvuri Subbarao has warned that “counter-cyclical buffers require judgements to be made on the trajectory of the business cycle and on identification of the inflexion point. Wrong judgments can entail huge costs in terms of foregone growth” (Subbarao 2010). Further, one of the fundamental reasons for the failure of Basel II norms to check the global crisis is attributed to the dominance of the G10 in Basel committee and in agenda setting and the influence of large international banks over the sub-committee (Lall 2009). Basel III, which has a larger representation, could overcome these shortcomings by making the decision making process more transparent by encouraging public discussion on the process.
- The other important issue relevant to the sustainability of the G20 grouping as a global policymaking forum is the membership selection process. At present, it is ad hoc and does not enjoy much support outside the G20 nations, particularly among the non-member European countries. Though increasing membership would add to the difficulty in arriving at meaningful decisions within a reasonable time, expanding the membership base to accommodate the changing dynamics of the world economy is imperative. The G20 might consider institutionalising new membership by having rule-based inclusion in a stipulated periodical revision. Simultaneously, the G20 has enjoyed more legitimacy by including the EU, the World Bank, and IMF in its meetings. Expanding this to include regional blocs such as the ASEAN and other regional bodies in G20 meetings in the line of EU would increase the credibility of the G20 process.
- The other important administrative reform required is to institutionalise the G20 agenda-setting process. At present, the presidency is responsible for setting the agenda. Unlike other global governing bodies, the G20 does not have a permanent secretariat for the reason that it functions as an informal forum to build up consensus. However, having a Troika secretariat, i.e., having the past and future presidency also contribute human resources to the secretariat, would ensure some kind of institutional continuity.
- In course of time, the G20 should also consider how to assist in the reform of the structures and mandates of other global institutions of governance dealing with trade, political and security issues and effect better commitment and co-ordination through more democratic participation.
The G20 initiative is indeed at a crossroads. When global recovery is at an uneven pace across countries and some parts of the world seem unable to get out of the possibility of double-dip recession, the G20 needs to segregate immediate concerns from long-term goals. A coordinated fiscal and monetary policy for advanced countries where recovery is weak should ensure that loose monetary policy in these countries does not lead to huge capital inflows to emerging markets, creating problems in exchange rate management and export competitiveness. In the medium term, the longevity of the G20 will be based on its ability to devise a framework for more inclusive global growth and on its ability to constructively move towards it.
Eichengreen, Barry (2009), "The G20 and the crisis", VoxEU.org, 2 March.
G20 Research Group (2010), "G20 Toronto Summit Final Compliance Report", The Munk School of Global Affairs, University of Toronto.
Lall, Ranjit (2009), "Why Basel II Failed and Why Any Basel III is Doomed", WP 2009/52, GEG Working Paper series, University College, Oxford
Subbarao, Duvvuri (2010), “Role of Emerging Economies Going Forward and Key Policy Challenges”, IMF, October.