India against caps on current account balances

India against caps on current account balances

New Delhi: India will oppose any plans by the Group of 20 leading economies to impose caps on individual countries’ current account balances as a solution to tensions over currency policies, a finance ministry source said on Thursday.

The G20 finance ministers and central bankers meet in South Korea on Friday and Saturday to try and reach an agreement on how to deal with trade and growth imbalances ahead of a meeting of their leaders in November.

One proposal is for G20 members to commit themselves to a cap on current account balances, which officials reckon would be a palatable solution to strains caused by massive investment flows away from low-growth, low-return rich nations to faster growing emerging economies.

“I do believe that this has to be looked at more fundamentally and by artificially linking the current account deficits levels to the GDP, you are merely skimming the surface," the official, with direct knowledge of G20 deliberations, said.

“I am not sure that this will be supported by very many emerging economies", the official said.

Pushing through any agreement is not going to be easy in a group whose current account balances range from a 5 % deficit in the case of Turkey to Saudi Arabia’s 7 % surplus.

India, Asia’s third largest economy, is expected to grow at 8.5 % for the current fiscal that ends in March 2011. Its current account deficit, nearly 3 % of GDP at a record $13.7 billion in June and the worst in three decades, is a sign of rampant demand in that vibrant economy.

It also makes India more welcoming to funds that rich nations have pumped into their struggling economies and which now are being diverted into emerging markets in search of higher returns.

“We believe that trade flows should not be restricted..", the Indian official said.

India however believes the G20 is the right forum for discussions on currencies and the impact of quantitative easing policies in the developed economies.

“Ours is also more of a domestic growth story but with QE battles likely to be played out in developed economies, it complicates monetary policymaking for us at a time when inflation is still high.

“So we are open to any discussion or solution to this vexed issue and believe this is the right platform for that."