The world is looking at India as a destination for investment: Gita Gopinath

From your engagement with India on G20, what do you reckon are our top priorities during the G20 presidency?

We are working very closely with India on its G20 presidency. India has very good set of priorities. India is pretty much focused on ensuring that the Global South, especially the low-income countries, has sufficient access to finance. That is a priority. Also, India cares a lot about energy and food security that is critical for developing countries and more generally, around the world. That is one area we are working with India. A second major area is in the space of debt. We have around 60% of low-income countries that are either already in debt distress or in high risk of debt distress and we need to have effective debt resolution mechanisms. The G20 produced what is called the common framework to provide this kind of mechanism and while it has had some success, we really do need significant changes to make sure that it delivers much more quickly. India is very keen towards making that happen and we are working with India on that. A third area is the crypto landscape. We have seen the meltdown in that sector and we should make sure that we have regulations in place. Another area is climate finance. The risks from climate change are tremendous. Countries need to adapt and mitigate and for many developing countries, you need large scale financing to make that happen. How do we get enough financing? That is another area on which we are working with India.

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What tangible progress or specific milestones would you hope G20 can achieve in the next one year?

To just put things in context, if you think of the last few years, the G20 produced the common framework which I say is a very important part of international financial architecture now. The G20 is where you came to agreement on an international corporate minimum tax, another very important development. A third area is what Indonesia accomplished in terms of having a financial intermediary fund at the World Bank to help deal with future pandemics. That was a G20 outcome. In terms of the current presidency, I would say that making significant progress in the functioning of the common framework so that it actually delivers debt resolution of countries on a much more timely fashion would be a very concrete outcome. Second, when it comes to crypto in general and Central Bank Digital Currencies (CBDC), the goal is to have an understanding on principles that guide regulation around the world because we know that no single country can solve this problem on their own. If the principles can be agreed on this year—of course every country will have its own specific details but if there is a broad set of agreements and principles on what exactly these different crypto assets are, how do we classify and regulate them, and how do we prevent loss of monetary sovereignty in countries and so on—that would be a very concrete outcome. And lastly, IMF quota review is happening this year. Having a successful review, I would say, would be another outcome. There are several tangible and concrete things that can be accomplished. For everything I have seen, India is very determined and is working very hard to make progress on all these fronts.

Many are calling the rise of protectionism and severing of trade and investment linkages as the reversal of globalisation. What is IMF’s message to the G20?

IMF’s message to the G20 is very clear on this, which is, while we understand that countries need to build resilience to supply shocks, and we have seen many supply shocks that have been created from the pandemic and from the war, it is absolutely critical that we do not have what we call runaway fragmentation. It means we do not move to a world where every country decides where they are going to go on their own and provide large scale subsidies to multiple industries so that they produce things at home. History has shown over and over that strategies of those kind can have very negative effects for countries themselves and it is not a sustainable strategy for the world. The second thing is that we need to have a rules-based trading system that has benefited the world tremendously. Yes, there are areas that still need to be fixed. But we know the rules-based system is really the only way to ensure that we have the kind of trade that brought about quite a lot of global prosperity. That is another big area we are pushing on. So we need a forum where we can have these discussions and G20 is such a forum to make that happen.

It is clear by now that to overcome the challenge of inflation in many parts of the world and the flagging economic growth, you need some kind of coordinated international intervention. Are you hopeful that this G20 will help accelerate that process?

That is what G20 has traditionally been able to do. I am hopeful that that is the case. I have to say that in February, after Russia’s invasion of Ukraine and what followed in terms of G20 meetings, I was beginning to worry that G20 may not be able to provide that kind of forum, but we had the leaders’ summit in Bali in November, there was a joint declaration that was agreed on, including that this is not the era of war. That, including the meeting between President Biden and President Xi, provided hope that G20 can still deliver.

Are you concerned that geopolitical tensions and the divisions within G20, could hinder the progress that could otherwise have been made?

It is not going to be easy. That is for sure. There are serious geopolitical tensions. Russia’s war in Ukraine is something that should end immediately. There will be tensions. But the fact that G20 presidency was headed by Indonesia this year, India through 2023, we then go to Brazil for 2024 and then South Africa for 2025, the fact that emerging markets basically holding the presidency of G20 for so many years for whom it is absolutely critical that the world is not polarised and that all major economies of the world are working together, I think is very important for G20 to be able to continue to be the forum where there is cooperation happening at the global level.

IMF has forecast that 2023 is going to be more challenging than the current fiscal. This of course is bad news for emerging economies which are facing varying degrees of difficulties. What are the shocks that they should brace for, in your view?

Firstly, it is slowing global demand. We have global growth projected to slow from 3.2% (in 2022) to 2.7% next year. We will have an updated number in January. The weakening external demand is one headwind. The second headwind is the tightening of financial conditions. We have seen major central banks raise interest rates rapidly this past year. Usually, the effect of this shows up with a lag. So, 2023 is the year when we are likely to see most of the effects. As long as it is well behaved, their response, there will be tightening, which means countries will have to adapt to it. That is one way. But there are things that can happen, you can have turbulence in the market, you can have over reaction in markets, that is something that we have seen to a limited extent so far. But that does not mean it cannot happen again.

A lot will again depend upon the path of inflation that we see in the major economies. Yes, there has been some positive news in the last couple of months, for instance, in the US, (but) it is far from declaring a victory at this point. So that is the second important area where we will see headwinds. A third area is, I would say, more generally, when it comes to energy and food prices, I don’t think we are out of the woods. There is the risk of volatility there depending upon whether you are an importer or exporter, you can win or lose from that. Lastly, China’s growth has slowed significantly. That has implications for the world, especially for countries or regions that trade a lot with China.

How do you assess the risk of currency depreciation and flight of capital? Is there a real risk today of recurrence of the kind seen during the Asian financial crisis?

As of now, we do not see such a risk. While we will have many countries that will be in debt distress, vast majority are low-income countries. In terms of their share in global GDP, we are not looking at a large number. So we do not have an emerging market crisis at this point. There has been tightening financial conditions but the adjustments have been, I would say, mostly well-behaved for these larger emerging markets and that is also a reflection of the fact that over the past years, these countries have learned the lessons of history and they have tried to protect themselves by building up substantial forex reserves and sounder macro policies. We certainly see more resilience in that dimension. But I do not think we are not out of the woods here. We still have financial tightening happening around the world… Right now, we do not have it, but again I would not take it completely off the table.

Could the sharp correction seen in the crypto market and the potential for a further rout in that asset class have a cascading effect on other asset prices? Also, is there an exposure problem—are there countries where substantial part of the middle class has exposure to crypto assets and the collapse could worsen problems?

So far, we have not seen substantial spill overs from the crypto market collapse to other sectors of the economy or other asset prices. It has been relatively contained. Of course, there are countries—for example, El Salvador—that adopted bitcoin as legal tender and the collapse in price of bitcoin has significant consequences for that particular strategy. At the extremes, yes, we do see consequence of this spill over but more generally, I would say, as of now, it has been quite contained.

If we look at India’s economic performance, exports are showing signs of losing momentum, but private consumption, fixed investments and government’s capital spending showed strong positive trend in the first half of the fiscal. Going forward, which growth engine should India focus on, particularly in the next financial year?

We have seen some good growth numbers in the last few quarters. In terms of sources of growth, we have seen recovery in private consumption, private investment and there has been strong public sector investment. Going forward, for next year, we do think that the investment channel will be one of the main drivers of growth in India. Private consumption growth will continue but it will slow, given that it cannot be as fast as what we saw coming out of the pandemic.

In terms of the headwinds, external demand will be weaker than what we had this past year, in line with global conditions. That has a negative effect. Tightening financial conditions around the world can have implications for India and can be a possible headwind. On the positive side, what I do see is that because of the need for countries to diversify where they buy from, there is a lot of interest in India now. The world is looking at India as a destination for investment. That is one positive headwind for India.

As a consequence of the appreciation of US dollar, many countries including India saw a drawdown on their forex reserves as they try to stabilize currency. Do you expect the trend to continue?

What we see is that many countries have actually let the exchange rate adjust to an important extent and yes, they have intervened to some extent in the market. But they have actually let the exchange rate adjust to changes that are happening around the world. India, too, has done that. There has been some decline in foreign exchange reserves but India has a very healthy level of reserves. So that is not an issue. In terms of the pressures on the currency, one of the big factors has been US monetary policy raising interest rates and that has been the fundamental driver of the strengthening of the US dollar and weakening of many currencies. That is changing right now. We are likely to see a slowing pace of interest rate increases and at some point, the Fed will hold. So then we have other countries including India that are on the path of some more monetary tightening. With those relative movements, we should see several emerging market currencies gaining in value.

There appears to be a sense among several emerging market economies including India that there is a need for a new generation of multilateral development institutions and that Bretton Woods institutions do not reflect the new reality of the emerging world order. What is IMF’s take on this?

International financial institutions are not stuck in time. If you look at the IMF over the last many decades, the IMF today looks very different from the IMF what was set up. There is constant adjustment and adaptation and review of the role of international financial institutions. That will continue going forward. I think it is important for people around the world to show a mirror to international financial institutions and point out areas where greater progress is needed and what needs to be done better and how to get these institutions to deliver on their mandates better and I can say that at the IMF we very much value that kind of feedback and try our best to adapt to these changing circumstances.

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