Indian Prime Ministers are probably more used to being lectured to on economic policy than sermonising themselves. It was therefore a surprise to see Dr. Manmohan Singh deliver some home truths to a gathering of Heads of State representing 80 per cent of global GDP at the G-20 summit in Los Cabos on Monday.
To boot, he donned the role of a global philanthropist, pledging $10 billion to the International Monetary Fund (IMF) firewall for the eurozone.
The wheel has indeed turned full circle for a nation that merrily sought assistance from the Bretton Woods twins till as recently as the 1990s. But more on that later.
The speech delivered by Dr Singh must have stunned the audience, especially leaders from the eurozone, as he bluntly told the gathering that Europe was getting it all wrong in its approach to solving the crisis. He also left the gathering in no doubt about his displeasure on the impact of the crisis on the developing countries due to disruption in capital flows.
The Prime Minister was probably reflecting the collective views of the developing countries in general and the BRICS grouping in particular when he said: “An expansion of investment in infrastructure in developing countries is only possible if they can get access to long-term capital to finance such investment. This is difficult at a time when capital flows are disrupted.”
His comment that liquidity must be provided along with an effective “adjustment programme” is also a reflection of the general discontent in the rest of the world with the way eurozone leaders are attacking the sovereign debt crisis. Promising and providing massive funds without a structural adjustment of the economies in the crisis-afflicted countries is not going to solve the problem. Most if not all of the bailout money has been used to rescue banks in the troubled countries.
Dr. Singh also dived into the debate over austerity in the eurozone and the impact that it was having on recovery. Germany has held out strongly in favour of stringent austerity measures in the bailed out countries and those measures are now actually hindering the recovery process. Calling the relationship between austerity and growth “contentious,” Dr. Singh pointed out that “synchronised austerity” across many countries is not the right medicine when the growth impulse is weak.
$10 billion contribution
Germany and its stubborn Chancellor Angela Merkel, therefore, got a piece of sane economic advice from the economist Prime Minister: “Austerity in the debt-ridden members of the eurozone can work only if surplus members are willing to expand to offset contraction elsewhere in the currency area.” Germany, the strongest economy in the eurozone, has to loosen up and even be prepared to face an elevated level of inflation if the crisis-ridden countries are to turnaround. That seems to have been Dr. Singh’s thrust.
Lest his advice be seen as gratuitous, the Prime Minister backed it up with a hefty $10 billion commitment to the $430 billion IMF eurozone fund. This is part of the overall $75 billion — including $43 billion from China — that the BRICS nations have committed to the fund. But it already has raised eyebrows in the country.
Why should India, a developing economy enmeshed in its own economic problems, cough up such a huge sum to the rich Europeans, is the question many are asking. The question is understandable but to agree with it would be taking a narrow view.
First, this is a commitment only and it is not as if hard cash is about to flow out of India into the IMF’s coffers. The commitment will be called upon only if the fund is required to be used. The IMF fund is in itself a comfort scheme for the eurozone aimed at calming the market.
Second, this assistance is part of the overall BRICS portfolio and India has to play its role with the others in the group. Third, this is not philanthropy but enlightened assistance because the eurozone is India’s largest trading partner and the country can ill afford a collapse there. Already the crisis has manifested itself in lower trade volumes with exports slowing down.
India needs a return of stability in the eurozone for its own benefit. It could be argued that $10 billion will hardly make a difference in the overall scheme of things but the answer is that India can only do what is possible within its capacity. The idea is to help a trading partner in distress, no more, no less.
Fourth, though the sum appears big, it is hardly so for a trillion-dollar economy growing at 6.5 per cent. Yes, there are economic problems that India faces and they are serious but to use that as an argument to question the assistance would amount to belittling the role that the country plays in the global scheme of things.
Finally, it must also be remembered that the IMF lends only what it gets from its members. India has used IMF assistance in the past. Now when it is in a position where it can be of help, it needs to play its part. $10 billion is a small sum to pay for being a responsible member of the global club. And don’t forget, it is also a signal of India’s economic strength to all those naysayers, not the least of whom are the ratings agencies.