Indias Relations With The International Monetary Fund (IMF)

25 Years In Perspective 1991-2016

V. Srinivas

• Editore: VIJ Books (India) Pty Ltd
• Anno: 2019
• ISBN:
  9789388161633
• Edizione: 1
• Argomento: Politique et relations internationales
• Categoria: Géopolitique

From one of India's senior Civil Servants, a brilliant analysis of the critical moments in India's economic history and the future of multilateralism in the International Monetary Fund that could decide the future of global crisis resolution.V. Srinivas – distinguished Additional Secretary to Government of India, former Advisor to the Executive Director International Monetary Fund and Private Secretary to Finance Minister of India, a widely acclaimed administrator and academician – provides a comprehensive analysis of several big events that stand out in India's relations with the International Monetary Fund based on 17 months of research and interviews.India's Relations with the International Monetary Fund 1991-2016 provides insights into India's role as a Founding Member of the IMF, India's IMF programs of 1966, 1981 and 1991, India's gold purchases from the IMF in 2010, the rise of G20 and India's emergence as the fastest growing major economy in the world. V. Srinivas highlights the role of the IMF as the lender of last resort, the IMF as an institution of asymmetric power in dealing with member countries, the enhanced role of the IMF post-2008 Global Financial Crisis and the Rise of China in the International Monetary System."India's relations with International Monetary Fund 1991-2016: 25 years in perspective" is the first comprehensive study on the subject that offers deep insights into an Institution that has influenced the global economy in a significant way.

CHAPTER – IX

FINANCE SECRETARIES, GOVERNORS OF
RBI, CHIEF ECONOMIC ADVISORS AND
EXECUTIVE DIRECTORS

This chapter presents the views of Institution Builders in the India-IMF relations following discussions with the author.

India-IMF relations have remained constructive and cordial for several decades. The men who contributed to strong India-IMF relations were visionary civil servants who were willing to accept the principles of economic liberalism and macroeconomic stability placing the Nation of a high growth path amidst the fastest growing economies in the world.

The Finance Secretaries

Dr. Montek Singh Ahluwalia, a seminal figure in Indian economic policy making served as Secretary Department of Economic Affairs, Founder Director Independent Evaluation Office of IMF and Deputy Chairman Planning Commission. His imprint on the economic governance of India has been significant.

On his years in IEO

The Vajpayee government was willing to offer my services to the IMF for the post of Director IEO. It was a new job, and I could recruit professionals from scratch. We produced the first few evaluation reports. The experience convinced me that every organization needs an IEO on how to conduct evaluations. I replicated it in the Planning Commission with the IEO being headed by an official in the rank of a member, who would get expert views and place it in Parliament. In the Fund, once the Director signs off on the report, it goes to top management. The Directors of the Department concerned can comment and the Board had a clear sense of what was happening. The new Government did not want a Planning Commission. The Director IEO of Planning Commission shot off a report in 2 weeks without consulting anyone that Planning Commission should be shut down. Even the NITI Aayog as an independent organization needs an IEO.

On being part of the Government in 2004-2009 years when Indian growth rates had peaked.

There was a global bump up in 2004-09 period. The growth was a result of lagged effort by several Government. India’s time had come. India achieved 8.5 percent to 9 percent over longer time period. Anything above 7 percent was a new India. Contrary to other perceptions, poverty was coming down too. Literacy levels also went up significantly. I also felt that high growth rate cannot be taken for granted. The 11^th and 12^th Plan documents brought out the underlying risks to the Indian growth story.

On the policy responses to the 2008 global financial crisis.

The global mood was for fiscal expansion. Most Governments liked the fiscal stimulus, reducing tax rates, additional liquidity in the system. The IMF perhaps said that while the world needed a fiscal expansion, India may not need a fiscal expansion. It would have been better if the one or 2 year bonanza was spent on infrastructure financing.

On his critical role as India’s Sherpa at the G-20 meetings.

After the initial crisis, I am not sure what the G-20 achieved. The major countries met periodically. The composition of the G-20 is not very comprehensive. Argentina for example, is a member. The French wanted a G-15. Its good for India to be at the high table, but more important is what do we do once we are at the high table. Prime Minister Modi on the issue of climate change said that India would accept the challenge of cutting emissions. Climate change is one area where pressures of being part of elite group worked. There were occasions when the MOEF objected to 12^th Plan targets citing international obligations.

On the changes in the IMF after the 2008 Global Financial Crisis and how he sees the IMF in the decade 2020-2030.

The Fund is a good international organization. The Fund has changed over time with received wisdom. The western world wants the Fund as an organization that will predict crisis in major countries, formulate technical papers and surveillance. For smaller countries it will be a good institution for lending. If India were to have a crisis, the Fund will not be empowered to finance India. An International Monetary Fund with US $ 360 billion is not much. If India were to go to Fund today, it would need about US $ 50 billion financing. It is very unlikely that the Fund’s Executive Board would part that much moneys.

For decades, the multilateral governance institutions were led by the United States. It is difficult to envisage an American leadership for multilateralism in the current context when protectionist forces are gathering momentum. Although the United States is unlikely to say that the IMF should be abolished, it may not support the Institution too much in the coming years. The Fund itself may think of its future, 5 years from now. I would refer to the Michael Camdessus report on the Future of the Fund.

The IMF faces a problem of mission creep. Fiscal professionalism is the need of the hour. No one has given the Fund a license to look at other issues. The Fund has to look at short term measures to tighten the belt – that’s what is Fund’s role. The Fund has to prescribe that the fiscal deficit is unsustainable and leave it to Governments to achieve the fiscal targets. The Fund is getting into issues that it has no role.

On Financial Stability, the IMF is not doing much. The Financial Stability Forum and the BIS are doing far more. Unfortunately, no one in the west is looking at the Fund for financial stability.

Today, India is a moderately open economy. In 5 years, we will be better. Government needs to be aware that the Indian financial system is integrating rapidly with the global economy. Subsequent to the global financial crisis, India’s financial sector integration has progressed well, although I am not sure if the dollar exposure of some of the Indian corporates have been well thought out.

On his memories of the 1991-93 years. On the convergence in ideas between Dr. Montek Singh Ahluwalia and Mr. Hubert Neiss led to the success of the 1991 reforms program with IMF.

History will remember us well. Even the IMF history says that Indian officials knew what we needed to do. It must also be borne in mind that at the political level there was deep understanding of the IMF program which ensured political support for the economic reforms.

India is a poster child for the Fund. Each of their 3 programs were terminated earlier than projected. Post program growth rates were always higher than pre-program growth rates. The repayments were always on schedule.

The 1981 program the IMF said we don’t need the money. M. Narasimham networked with the IMF management at a time when we were not doing too well. Prior to the 1991 crisis, there were a lot of internal papers in the Indian government on the reform process. Indian policy makers were aware of the way we had to go. There is no doubt that the 1991 crisis triggered the economic reforms. Only the Left parties were opposed to the 1991 economic reforms. History has proved that the Left was wrong and the Government was right on the economic reforms of 1991.

The Fund staff knew how to deal with large countries like India. Their relations with us were always cordial and constructive.

When I look back, I wonder what would the then Secretary DEA Shukla and CEA Deepak Nayyar would have done. During discussions on trade policy, they were opposed to trade reform at that stage.

On the 1985 Long Term Fiscal Policy Document. On the fiscal expansion of the 1985-89 period creating an unsustainable fiscal policy.

The LTFP was a Finance Ministry document. It was unfortunate that the Finance Ministry eroded it. Indian Finance Ministers are not judged by fiscal prudence. There was a massive expansion of defense expenditure in those years. The Government felt that the capacity to do more in Defense was necessary for India to be taken seriously. Subsequent experience proved that it we want to be taken seriously, the best way is to raise GDP. We underestimate the fact that how much China has achieved by staying under the radar in terms of economic growth.

On his Memories of the 1997 East Asian Crisis and the impact on India.

The East Asian crisis did not alter the world. It was quickly brought under control. Korea recovered quickly, Indonesia suffered, Thailand and Malaysia which faced the crisis also came recovered. The RBI did convey the impression of a professional organization. The NDA government wanted a strong rupee. That said, the Governor RBI, Jalan convinced the Prime Minister on the benefits of a weaker rupee. Both the RBI and the MOF gave the impression that eyes were open during the 1997 crisis.

On how he sees the economic reforms progressing 2014 onwards.

The reforms process is a continuation of the previous Government. There have been 2 important steps – the GST and the Bankruptcy code. For GST both Government and the Opposition can take credit. The Bankruptcy code is an important step to handle the challenges of non-performing assets and the multiplicity of interest rates. It could also consider to identify bad banks and staff them with RBI officials to tackle the NPAs. There are issues of consortium lending where a lot of responsibility is left to the Lead Bank most of the time. I have often asked “Who is suffering with NPAs? The truth is nobody is suffering except the Banks.”

On his 30 year legacy in economic policy making at the highest levels of Government.

The leader was Dr. Manmohan Singh. Around him there was a lot of collegiality in economic policy making. We could build teams of officials to work together. It was always said that the United States was one country that could put a team together. The Indian growth story reveals the success that we have had in working in teams.

Shri Shaktikanta Das

Shaktikanta Das, IAS served as Joint Secretary/ Additional Secretary in the Department of Economic Affairs, as Secretary Department of Revenue and Secretary Department of Economic Affairs for the years 2008-2017. During his long tenure in the Department of Economic Affairs he was closely associated with India’s economic reforms and global financial sector integration. He has been a dominant force in the 2014-17 period in major economic reforms in India. Shri Shaktikanta Das was appointed Governor of the Reserve Bank of India on December 12, 2018.

On the changing role of the IMF.

Till 2008, the IMF’s role was largely bilateral surveillance. After 2008, the IMF strengthened multilateral surveillance. The IMF’s role got a further boost with G-20 becoming an active forum. The G-20 summit meetings and the OECD meetings provided the IMF with a forum to present its analysis of the situation. This brought about a quantitative shift in the IMF’s role in the global arena.

The IMF kept advocating a 3 pronged approach to deal with the global crisis and restore economic growth – use the additional fiscal space available, monetary policy expansion and structural reforms.

On the Challenges in dealing with capital flows into India.

There was a huge surge in capital flows post the global economic crisis. Long term flows are always in India’s interest. There was a lot of capital in a world witnessing slow growth and slow appetite for investment, and money was flowing to markets with better returns, India was seen as a robust economy, markets were giving good returns and structural reforms were strong.

Post 2014, the Government initiated a number of steps to ensure inflow of stable long term capital into India – focus on make in India, focus on improving the ease of doing business including removal of licenses and FIPB abolition. Another very important step was the introduction of easier customs clearances and building permissions. On the taxation side, GST was the single big step forward. While the GST bill was introduced in 2011, it could move forward only in 2014 in consultation with the State Governments. The flexibility shown by the Union Government helped in breaking the deadlock between the States and Centre. The compensation period to States was increased to 5 years for revenue losses. The reduction of corporate income tax from 30 percent to 25 percent in the 2015-16 budget was a big step forward.

On structural reforms, the Government addressed the hibernation of FDI policy by initiating major FDI reforms. The major FDI liberalization of November 2015 and March 2016 provided for significant sectoral easing of FDI caps including the introduction of FDI in real estate. Following the sectoral easing it was seen that 90 percent of FDI was coming on automatic route and only 10 percent was coming on FIPB route. This made abolition of FIPB much simpler.

In your tenure as Secretary DEA, India had emerged as the Fastest Growing Major Economy in the world. The transformation causes.

The transformation was built on fiscal prudence and rigid adherence to FRBM’s long term fiscal targets. The SEBI initiatives for reforms of capital markets and reforms of stock markets including the introduction of online trading enabled greater financial sector integration. The introduction of Masala Bonds which were rupee denominated bonds enabled internationalization of the Indian rupee. Several PSEs like the NTPC, NHAI and Private sector companies like HDFC used the Masala Bonds for raising foreign capital. There was simplification of the external commercial borrowings regime and G-secs markets both of which could follow the KYC norms. India’s participation in the Financial Action Task Force (FATF) enabled the simplification in external commercial borrowings reforms.

Views on the Fund’s bilateral surveillance. Usefulness of recommendations from the Article IV consultations.

The Article IV consultations provided Government with an outsider’s view of the Indian economy. We were not bound by the recommendations. We were autonomous in economic policy making. There was considerable convergence of thoughts with regard to adoption of inflation targeting and subsidy reforms. We also accepted IMF advise on the manner in which we were calculating our fiscal deficit, by agreeing to reflect bonds in the fiscal deficit. The Finance Minister subsequently announced that the Government would not release subsidy payments to oil PSUs by way of issuance of bonds. Subsidy payments would be in cash form in fiscal accounting of Government.

On the way forward for India-IMF relations.

Going forward perhaps it is time for MD IMF to be from outside Europe. It is Asia’s economic decade and our strengths should be reflected in the IMF quota reforms. The IMF has used bilateral windows of funding for raising resources to finance the programs following the 2008 global crisis – the New Arrangements to Borrow and the Note Purchase Agreements could have been incorporated into quotas for raising additional resources. Further quota reforms are necessary to reflect the actual economic strengths of Asian Nations.

On the technical assistance side, India and IMF have signed the MOU for establishing the SARTAC, the South Asia Regional Training Center for capacity building of central government and state government officials.

There has been a continuity in India-IMF relations. From the major structural and taxation reforms of 1991, till the bilateral surveillance of 2017 under Article IV, the India-IMF relations have been marked by strong national ownership and convergence of ideas.

The Central Bank Governors

Dr. Y.V. Reddy, IAS has been one of India’s most seminal civil servants who served as Technical Assistant to the Executive Director (India) in the World Bank, as Joint Secretary in the Department of Economic Affairs during the 1991 crisis, as Deputy Governor RBI, as Executive Director (India) in the IMF and as Governor Reserve Bank of India and Alternate Governor to the IMF (2003-08).

On the Bretton Woods Institutions

In the Bretton Woods Conference that took place towards the end of World War II, 44 countries were represented, India was an acti...

Indice dei contenuti

• Cover
• Title page
• Copyright page
• Dedication
• Contents
• Foreword
• Preface
• Acknowledgements
• Chapter – I The International Monetary Fund
• Chapter – II Major Financial Crisis: From Great Depression to The Great Recession
• Chapter – III India’s IMF Programmes—1966 and 1981: An Analytical Review
• Chapter – IV India Circa 1991 – Origins of the Crisis
• Chapter – V The Union Budgets 1991-96
• Chapter – VI The IMF View – India’s Stand-By Arrangement
• Chapter – VII Evolutionary Changes in India-IMF Relations
• Chapter – VIII The IMF’s Article IV Consultations 1997 – 2016
• Chapter – IX Finance Secretaries, Governors of RBI, Chief Economic Advisors and Executive Directors
• Chapter – X My Years With The IMF
• Chapter – XI G20 – A Decade in Multilateralism
• Chapter – XII The Rise of China in the International Monetary System
• Chapter – XIII Conclusion
• Index