Interview with Planning Commission Deputy Chairman Montek Singh Ahluwalia

Ashok Dasgupta

Planning Commission Deputy Chairman Montek Singh Ahluwalia left early on Monday for London for the preparatory sherpa meeting ahead of the G-20 summit of Heads of State on April 2, which is to be attended by Prime Minister Manmohan Singh.

In an exclusive interview with The Hindu prior to his departure, Mr Ahluwalia spoke at length on issues pertaining to the global financial crisis, the steps that need to be taken to combat the resultant slowdown and India's expectations from the summit.

Q: What is the backdrop of the G20 London summit?

A: The summit is taking place at a time when there is global crisis of extraordinary magnitude, the worst in 60 years. I think all the leaders understand that the summit’s aim is to look at the global economic situation, to review what has been achieved in the areas identified in November last year when they met in Washington and, may be, to give some messages on what should be done in future.

Q: What is India’s expectation from the summit?

A: Obviously, we are interested in all the different elements of the global crisis which needs a global response. India is one of the 20 countries which represent about 70 per cent of the world GDP and we hope the summit comes out with a global message which meets our expectations. We need a revival of the global economy, we need the financial system in industrialised countries to get fixed as soon as possible, without which it is difficult to envisage a revival of confidence. We think that the global community needs to take some special measures to make sure that the developing countries are helped at a time when a crisis that was not of their making is having a very severe effect on them.

The whole shrinkage of private capital flows from emerging markets is massive, something like US$ 700 billion. Obviously, this will have an adverse effect on growth of many developing countries and I think that this withdrawal of capital has occurred not because of anything that has gone wrong in developing countries but because the financial systems in the industrialised countries malfunctioned. So the global community needs to take corrective steps so that some revival of capital flows takes place till the multilateral institutions step in. There is also the larger issue of financial architecture. We need to make sure that in a globally integrated world where a crisis in one part of the system can affect the whole world, we should have a global governance framework that can anticipate such crises and then take corrective action.

Q: From the Indian perspective, what should be the ingredients of these special measures?

A: First of all, it is very important that a coordinated effort is made by all major economies, including India, to take steps to de-lever the crisis. Since this is a period when governments have to actively intervene, it is our view that both monetary and fiscal policy should be actively used to restore growth momentum. On our own front, we would certainly tell the assembled leaders that we are doing what is necessary. We have had a major relaxation of monetary policy, we have had a major fiscal stimulus, we have tried to make sure that the more vulnerable sections of our population get an adequate flow of support through the NREG programme and we would like to see the rest of the world also take steps to stimulate their economies.

Secondly, I think it is very important that the global economies remain open. We are very concerned that there are protectionist noises being made and I want to emphasise that we must distinguish between a protectionist noise and actual protectionist action. The fact is that a protectionist noise actually gets converted into action unless there is a strong political leadership. When the leaders met in Washington in November, they had said that we must have a ‘standstill’ agreement -- in the absence of an agreement on the Doha Round -- that we will not increase protectionism. Actually, every country has taken some action but, by and large, the protectionist actions taken have been minor.

But protectionist pressures are rising and we are very concerned, for example, over financial protectionism. We support the fact that industrialised countries are trying to save their banking system. So when the banking sector has problems, we have to recapitalise banks. But some governments have said that one of the conditions of recapitalising is that they will preferentially increase domestic lending. This is protectionist. As a result, trade finance has dried up as banks are focusing on their own home turf. This hurts developing countries because if they have an incentive not to lend to trade, then I think trade will decline. So we are opposed to that.

Then finally, I think in the area of multilateral institutions, we can increase the flow of resources to developing countries through institutions like the IMF and the World Bank. Fortunately, India has no intention of going to the IMF as our reserves are very ample. But for developing countries as a whole, it’s very important that the IMF is adequately financed. The present position is that the IMF’s total resources are $ 250 billion, which is exactly equal to India’s foreign exchange reserves. Now how can the IMF solve the problems of the world if its resources are equal to only India’s reserves? On the one hand it tells you that India is very adequately protected, but it also certainly tells you that the IMF is not adequately funded. So we want more of that.