Last week, the G-20 states agreed tobolster the IMF’s lending capacity by $430 billion to help avert further fallout from the crisis in the Eurozone. Japan was to add $60 billion, with other donors including Saudi Arabia and South Korea contributing money as well. This agreement also included monetary commitments from key emerging market states, including China and India.
Another outcome from this weekend’s meetings included an understanding that the BRICS would be given greater representation at the International Monetary Fund through additional executive board seats and higher quota shares. The actual details are to be decided at the G-20’s June meeting, but the participation of these countries in the Eurozone crisis is much clearer than it was before. However, the New York Times’ Annie Lowrey did note that senior IMF officials don’t consider this agreement as tantamount to a change in the actual distribution of quotas at the Fund.
Unsurprisingly, Indian Finance Minister Pranab Mukherjee announced that he would hold up the contribution of India’s funds until some sort of official guarantee was reached with U.S. and European officials regarding these shares. India’s position on the IMF debate has been intriguing. Until this most recent meeting, the government has been nearly silent on the issue of expanding the IMF’s quotas. It hasgenerally agreed with the sentiment that emerging markets should be given more representation, but Mukherjee’s recent statements were perhaps the most pointed the government has said on the topic, especially in comparison to some of the other BRICS states. Was this statement a fundamental shift in the government’s policy towards the IMF, or just a temporary aberration from what has been a long standing norm?
India’s 1991 near-bankruptcy left it at the whims of the Fund, perhaps contributing to some of the biases that have reflected its policies so far. The IMF was a key actor during that period, and made the release of its bailout funds contingent on rapid liberalization efforts by the government. India is familiar with the Eurozone’s turmoil, having experienced a similar episode two decades ago. Current Prime Minister Manmohan Singh, as finance minister at the time, was involved with the IMF negotiations, and must be fully aware of the dire situation that left the country desperate for funds from the international community.
One explanation for the policy shift could be that the Indian government is finally seeking a presence at the Fund to add another voice to a campaign that has been led by China. Until now, China has been the most vocal on the topic, arguing since 2009 for greater quota shares at the Fund as a condition of its broader involvement. The October 2010 agreement to realign the IMF quotas was a manifestation of that pledge. As part of that plan, China was to get the number 3 position at the Fund. Indian policymakers must surely be seeking to counterbalance its northern rival with this strategy.
India’s problem is that even if it wishes to participate at the IMF, its incentives are opaque at best and don’t really reflect a coherent policy from the government. For China, the politics were simple: greater representation at the IMF meant that the world would reduce its reliance on the U.S. dollar, and inflation wouldn’t erode away at the Chinese government’s massive Treasury holdings. While the internationalization of the renminbi is surely included in this calculus, the currency has a long way to go before it can be considered in the same club as the dollar, pound or yen. Even though India’s reliance on the U.S. dollar certainly does hurt it in specific areas including oil imports, it doesn’t have nearly the same incentives for institutional change at the Fund as China does.
The policy shift perhaps then reflects the government’s efforts to address the threat of the Eurozone crisis. India has thus far been sheltered from the Eurozone crisis, as most of its economic output stems from domestic consumption. Unlike India, owing to its large exports, China’s fate is tightly bound to that of Europe. However, the Asian Development Bank recently warned that the Eurozone would cause marked slowdowns in both countries should the crisis not abate. For Indian policymakers, it’s clear that the best mechanism to answer would be through existing institutions.
Even if the government intends to expand its presence at the Fund, they need to establish a better strategy if they intend on actively participating. On an issue like the Eurozone crisis, which has the potential to bring India’s cooling economy into chaos, Nehruvian non-alignment won’t be adequate. In the coming months, Mukherjee should become much more vocal about the government’s intentions, and perhaps work with his American counterparts (the hold outs so far) to find a way to bring emerging markets into the fold faster. He should also work with other emerging market states to begin placing additional pressure on European governments, who are by the day becoming more desperate for cash.
Regardless of its final move, it’s clear that the Indian government’s passive attitude towards the current international economic situation is unsustainable and shortsighted. Hopefully, this new policy indicates a positive change in its approach.