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Thomas Richardson, senior resident representative – India and Nepal, International Monetary Fund (IMF), said the on-going US government shutdown will impact the country as well as the emerging markets’ economies if it continues. In an interview with Nayanima Basu and Indivjal Dhasmana he also said that IMF is awaiting the approval of US Congress on the proposed quota reforms that seeks to give more voice to the developing countries within the financial institution. Excerpts:
What impact do you see of the US government shutdown on emerging markets and do you see this going on for long?
I don’t think anyone knows whether the US budget stalemate will go on for long or not. Clearly, the impact on the US and any global spillovers will be greater the longer the partial government shutdown drags on. That’s why the head of the IMF, Christine Lagarde, recently argued that it is essential to resolve this uncertainty.
Developing countries including India and China are calling for expeditious quota reforms. Why is the whole process getting delayed?
In December 2010, the IMF’s Board of Governors approved key reforms to Fund quota and governance. These reforms, which took place under the 14th General Review of Quota, aimed to realign quota shares to better reflect today’s global economic realities. They envisaged a shift of more than 6% of quota from over-represented to under-represented member countries, and a further shift of more than 6% to dynamic emerging market and developing countries. At the same time, a key objective was to protect the voting power of the poorest IMF members. Significant progress has been made on making the 2010 quota and governance reforms effective, which will double quotas across the board and introduce a fully elected Executive Board. We urge the remaining countries, including the United States, where approval by Congress is needed, to quickly complete the necessary remaining steps.
Recently, in his address to the UNGA, Prime Minister Manmohan Singh stressed the need for the greater voice of developing countries in multilateral financial institutions. What are the issues you are facing in doing the same?
We at the Fund see greater voice for emerging and developing economies as a key objective, and one that is necessary if the IMF is to retain its legitimacy and effectiveness in the decades ahead. At the same time, we grasp that the process of quota reform has an element of “zero-sum” to it, and thus it reflects political realities that, as a civil servant, I would not be able to comment on.
Various rating agencies have threatened downgrade of India's ratings to junk. What is your take? How does IMF rate India's claim that it will rein the Centre's fiscal deficit at 4.8% of GDP this financial year and CAD at 3.7% of GDP?
We are optimistic that the central government will be able to achieve its deficit target for this fiscal year, but note that it will take some effort to get there. For example, fuel subsidies are now up sharply over the forecast embedded in the budget because of higher world oil prices and the rupee depreciation. Our preferred approach would be to reduce fuel subsidies by raising prices, especially for diesel, to cost-recovery levels, since there is a lot of research — including for India — which shows that fuel subsidies are not pro-poor.
On a fundamental level, we consider that the quality and sustainability of fiscal consolidation are crucial for rebuilding investor confidence, and in this regard we also support the effort to raise government revenues back to pre-crisis levels.
Has India approached IMF for pledging gold for loans or has India sought any kind of loans from IMF to shore up forex reserves?
The Indian authorities have not requested any IMF program, and we do not expect them to do so, given India’s generally strong level of international reserves, flexible exchange rate, and good medium-term fundamentals.
There are various estimates of the Rupee value against the US Dollar. What is your assessment?
We take a medium-term view of this question, and do not comment on short-term movements in exchange rates.
IMF projects India's economic growth on the basis of GDP at market prices. This does not give a fair idea as official method is GDP at factor cost. Are there any plans to shift to GDP at factor cost or also give projections based on that?
Analytically, estimating GDP at market prices is preferable, since the factor cost approach effectively treats subsidies as output. However, in India, we recognize that the underlying factor cost data is somewhat more reliable, so we report it in our India-specific publications.
Government has started taking a slew of measures after initial inertia. How do you assess those steps? Will investor confidence be restored in India's economy now?
We have been encouraged by a number of steps taken in recent months aimed at boosting growth and reducing vulnerability. We particularly welcomed the announcement in January that diesel prices would gradually be increased to cost recovery levels, though in light of recent events we feel the pace of adjustment could usefully be stepped up. The Cabinet Committee on Investment was also set up to accelerate a number of key investment projects which had stalled because of regulatory uncertainty. Going forward, our assessment is that it will take structural reforms to reduce bottlenecks to investment – such as cumbersome environmental clearances, lack of clarity regarding land acquisition, backward power linkages, etc. Getting these things right will boost investor confidence more than anything else.
IMF loans are generally avoided by countries because of conditions imposed. Do you think it is a fair criticism?
We have tried to revamp the IMF lending toolbox, creating a number of new products that we hope will better serve the needs of our member countries. These include precautionary credit lines for countries with stable economies and sound policies to make them less vulnerable to potential external shocks or spillovers. We have also streamlined the number and complexity of measures attached to Fund financial support, because we recognize that solutions have to be home-grown and owned by the country in question. We clearly understand that an outside partner cannot force a sovereign country to do anything it doesn’t believe is in its interest. When there is disagreement, we feel a much better, more durable, approach is to rely on persuasion through economic debate and discourse.
