Concerns over nuclear proliferation in Iran and the forthcoming climate change conference in Copenhagen cast a shadow over the principal issues before the Group of Twenty (G-20). It was expected that the summit in Pittsburgh would lead to consensus on four major areas, but progress was quite limited.
First was the question of tighter, closer supervision over banks, financial institutions and hedge funds on all matters of risk exposure, executive pay, bonuses and remuneration. The European Union (EU) would have liked a firmer commitment for greater regulatory oversight, but in the US, lobbies speaking for the financial institutions have already been effective in diluting the strong oversight commitments that the new President promised in his early days in office. One approach could be to link bonuses to medium-term performance—that is to say, wait for the benefits of the hedging strategies to actually materialize before the rewards flow to the broker, rather than factoring in the rewards as upfront costs. The US has instead put more emphasis on forcing banks to raise the quality and quantity of capital they have on hand to cover potential losses in an effort to better protect taxpayers from having to pay for banks’ mistakes. This approach has relevance to banks in India as well.
The second issue was the perception of the revival of the global economy. The EU would like concerted action on the easing of the fiscal stimulus, and worries about inflation are already being expressed. The emerging economies, on the other hand, would prefer national priorities to determine when the fiscal tightening takes place. For now, the G-20 leaders have chosen to walk a fine line between trying to keep inflation fears in check and avoiding having to raise rates or cut off stimulus until a broad recovery takes hold.
The third issue was to be the trade restrictions that countries have been putting in place in the last few years and the need to revitalize global trade. The most recent case of the US imposing tariff barriers on imports of tyres from China, and China’s retaliatory measures on import of chicken from the US are examples. Again, there were no clear resolutions of these concerns.
Fourth, there were the expectations from emerging economies, including India, on greater participation in decision making at the multilateral funding institutions as well as greater commitment by the donor countries on aid and assistance. In April, with several eastern European economies in crisis, there was more attention to the multilateral institutions—now that the crisis has passed, this has also moved to the back burner. There was no further commitment of funds to the International Monetary Fund (IMF) this time.
The most interesting part of the meetings was that India had very little to say on all of the above. First, with the financial sector tightly regulated, and banking predominantly in the public sector, the issue of regulating risks and rewards was not a primary concern in India. However, a large number of private funds and institutions are setting up office in India, and the delegates could have used this opportunity to press for their version of greater regulatory oversight over foreign institutional investors and private funds—but we had nothing to say.
On the second issue of fiscal prudence, we were definitely on the back foot. In the other countries, fiscal expansion has pushed liquidity into the system, recapitalized banks, provided insurance for risk and, in the case of China, funded infrastructure. In India, on the contrary, the fiscal expansion has gone for welfare schemes and subsidies, for the expansion of the National Rural Employment Guarantee Scheme—measures that cannot be rolled back, given the considerations of political economy. In short, monetary measures would have little impact in containing inflation given these political spending policies—and hence India has very little to contribute in the debate on the usefulness of the stimulus.
On the third issue of trade, while all the major countries have seen revival of export demand in July and August, we continue to post significantly negative figures—again a clear indication that we are out of sync with what is happening in the rest of the world. Therefore, the only plank left was for India to insist on greater representation in the multilateral bodies, an issue that was not even primary at this meeting, but where India’s stance was reflected in the communiqué, though without any commitments.
Finally, we were caught by surprise on the Non-Proliferation Treaty issue, and have been reassured by the Prime Minister that it was not meant for us—a reassurance that no one else in the meeting was prepared to give!
Though the media has been lauding India at the G-20 summit, there is a need to differentiate the respect that the Prime Minister commands as a person from the strategy that India is adopting. As for the first, there can be no doubt about the goodwill that he commands; on the second, we had little to say or to contribute.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at email@example.com