International Monetary Fund chief Christine Lagarde. (AFP photo)
International Monetary Fund chief begins her India tour on Monday and is expected to meet PM Narendra Modi and senior policymakers. In an exclusive written interview to TOI she talks about India’s growth potential, the Modi government’s reforms record and risks for the economy. Excerpts.
India is seen as a bright spot in the global economy. How do you see the economy’s performance?
India is indeed a bright spot, and economic development holds much promise. India has an opportunity to become one of the world’s most dynamic economies. My message will be: Seize it! Certainly, the numbers are on India’s side: The revised GDP data suggest a strong pace of economic activity, with growth likely to reach more than 7% in 2014-15. Inflation has fallen to around 5%, current account deficit has shrunk, and the rupee has been steady since late2013. The sharp drop in oil prices too is lending a hand. More work will be needed, of course. I think the government is keenly aware that it needs to further strengthen India’s fiscal position, including by improving quality of expenditure and public investments. The economy should be opened more fully to the world, and there’s a good case for removing domestic constraints on growth, especially in energy, mining and power. Further reforms of India’s complex labour laws to encourage young job-seekers and boost female labour participation, as well as easing of land acquisition and other clearances, will help revive the investment cycle and achieve faster growth. Moving the economy forward in this direction would help India sustain its flight of high growth and economic stability.
Your assessment of the Modi government’s performance and its reforms record.
PM Modi, his government and (RBI) governor Raghuram Rajan are skillfully shifting the focus to good macroeconomic management, transparent government, and inclusive development. I welcome the bold initiatives, including the move to formalize inflation targeting, the «Make in India» campaign, and the national mission to enhance financial inclusion.
The 2015 Budget struck a good growth-equity balance. There’s emphasis on increasing the provision of public infrastructure, and within a fiscally-responsible framework. Subsidy reforms are helping, but difficult choices remain ahead as the authorities seek to create ad ditional fiscal space for their highpriority spending. The private sector can play an important role in developing infrastructure, and the government is rightly focusing on much-needed improvements in the regulatory framework and overall business climate. It appears that the broad path of reform is established. Now implementation has to follow — as we know, success begets success.
What are risks on the external front for India?
One cannot ignore the risks of volatility in capital flows that could emerge as the US normalizes its monetary policy stance as advanced countries ramp up quantitative easing. As economic conditions improve in some advanced economies, some portfolio rebalancing out of emerging market economies can be expected, and it’s likely that market volatility will pick up in these circumstances.
India has prepared better than most emerging-market economies for any such external shocks, shrinking current account deficit and increasing stock of international reserves; the higher GDP growth expected now, should help.
Should India do more to bridge inequality? Any prescriptions?
India’s robust growth, which averaged over 7% the last two dec ades, has been a major driver of poverty reduction. Nonetheless, more than 250 million Indians remain below the poverty threshold.Income gaps within India, including across states and between rural and urban population, have increased. The new government’s push toward using the Jan Dhan platform to ensure welfare payments reach intended beneficiaries is commendable. Subsidies needed to help the poor often end up favoring the middle class. That’s why the JAM Number trinity — Jan Dhan, Aadhaar and Mobile could be a step up in terms of direct income support to the poor.
Our research on India finds that growth that’s more equitable is more sustainable, and that the combination of social spending and macro-financial stability, with attention to dampening inflation, are imperative for making growth more inclusive and reducing poverty. Raising the skills of the labour force through better access to education can unlock a cycle of higher and more broadly-shared growth. Let me emphasize the important role increasing women’s economic participation can play in boosting growth. We care about this. We need more economic growth globally and there’s evidence, including from recent IMF research on India, that bringing more women into the workforce can increase growth.
Your assessment of global economic situation.
Global growth remains moderate and uneven. Despite a boost from a decline in oil prices, we expect the world economy to grow by about 3.5% this year, picking up modestly next year to 3.7 %.
The outlook differs across countries and regions. In advanced economies growth has rebounded, in the US and the UK. In the Euro area and Japan domestic demand, especially credit to private sector and investment, has yet to recover fully despite monetary easing.
In emerging markets and developing countries, growth is projected to pick up from less than 4.5% this year to a little more next year, but it’ll vary widely across countries. Among the emerging markets, and compared to advanced economies, India is the bright spot.
Key risks facing the global economy.
One emanates from what I’ve called «asynchronous monetary policy» – normalizing monetary policy in the US while most others are increasing monetary stimulus.Even if this process is well-man aged, it may result in excessive financial markets volatility as investors reassess risk perception.
Second, emerging and developing economies could face a triple hit of a strengthening US dollar, higher global interest rates, and more volatile capital flows. A stronger dollar will impact financial systems in emerging markets because many banks and companies will have increased borrowings in dollars over five years. A further risk is that the Euro Area and Japan could remain trapped in a twilight zone of low growth and inflation. These «low-low conditions» would raise the risk of recession and deflation, because they’d make it harder for many countries to reduce high unemployment and high debt.
Finally, there are increased geopolitical risks. This points to the need for a powerful policy mix that can strengthen recovery and provide better employment perspectives for citizens worldwide.
What would be the impact of slowing Chinese growth?
China’s moving to a slower but more sustainable growth path – in the range of 6½-7% growth for 2015 – is good for China and for the global economy. In the short run, slower growth may reduce growth in China’s trading partners. However, this is a tradeoff worth making as by pursuing the right policies, China will secure higher income over the medium term. Higher income will mean China will import more, proving a welcome and lasting boost to global demand.
What’s the progress on quota reforms at IMF?
IMF is a global multilateral institution where countries like India deserve bigger say. Our governance structure needs to reflect more accurately the true weight of emerging markets in the global economy. We’re working hard to achieve that-on implementing quota reforms that’d lift India to be in the top 10 shareholders at IMF.
Should there be more coordination between global monetary authorities to prevent shocks?
I’ve emphasized the need to enhance global cooperation to embrace new multilateralism. Clearly, international policy cooperation would be beneficial, as coordination problems can arise between countries. Advanced economies may need to tighten monetary policy sooner if stability becomes a concern. Such action may worsen financial problems elsewhere. There’s scope for greater international policy collaboration to minimize negative spillovers. We’ve learnt important lessons from the «taper tantrum» episode in May 2013. First, advanced economies can help with effective communication concerning normalization of unconventional monetary policies, to reduce the risk of creating large market volatility.
Second, we need broader policy dialogue among advanced economies and the emerging and developing countries; policymakers need to be aware of the spillovers their policies might create, as well as mindful of the potential spillbacks. And finally, there’s scope for multilateral action that’d provide insurance against key downside risks, supporting economies more affected by market or liquidity strains, including through the use of IMF resources.
How do you see BRICS Bank impacting other multilateral institutions?
Look at the trend: The share of emerging economies in global GDP will continue to increase, with much of the increase driven by BRICS, in particular China and India. We are optimistic about the prospects of the BRICS Development Bank and believe the new bank can be an important source for investment financing. It could play an instrumental role in addressing existing infrastructure gaps -a key constraint to growth in many BRICS economies. More generally, to the extent that new multilateral banks make decisions based on economic principles, and complement and coordinate with existing development banks, we’d view these new institutions as a welcome development.
International Monetary Fund chief begins her India tour on Monday and is expected to meet PM Narendra Modi and senior policymakers. In an exclusive written interview to TOI she talks about India’s growth potential, the Modi government’s reforms record and risks for the economy. Excerpts.
India is seen as a bright spot in the global economy. How do you see the economy’s performance?
India is indeed a bright spot, and economic development holds much promise. India has an opportunity to become one of the world’s most dynamic economies. My message will be: Seize it! Certainly, the numbers are on India’s side: The revised GDP data suggest a strong pace of economic activity, with growth likely to reach more than 7% in 2014-15. Inflation has fallen to around 5%, current account deficit has shrunk, and the rupee has been steady since late2013. The sharp drop in oil prices too is lending a hand. More work will be needed, of course. I think the government is keenly aware that it needs to further strengthen India’s fiscal position, including by improving quality of expenditure and public investments. The economy should be opened more fully to the world, and there’s a good case for removing domestic constraints on growth, especially in energy, mining and power. Further reforms of India’s complex labour laws to encourage young job-seekers and boost female labour participation, as well as easing of land acquisition and other clearances, will help revive the investment cycle and achieve faster growth. Moving the economy forward in this direction would help India sustain its flight of high growth and economic stability.
Your assessment of the Modi government’s performance and its reforms record.
PM Modi, his government and (RBI) governor Raghuram Rajan are skillfully shifting the focus to good macroeconomic management, transparent government, and inclusive development. I welcome the bold initiatives, including the move to formalize inflation targeting, the «Make in India» campaign, and the national mission to enhance financial inclusion.
The 2015 Budget struck a good growth-equity balance. There’s emphasis on increasing the provision of public infrastructure, and within a fiscally-responsible framework. Subsidy reforms are helping, but difficult choices remain ahead as the authorities seek to create ad ditional fiscal space for their highpriority spending. The private sector can play an important role in developing infrastructure, and the government is rightly focusing on much-needed improvements in the regulatory framework and overall business climate. It appears that the broad path of reform is established. Now implementation has to follow — as we know, success begets success.
What are risks on the external front for India?
One cannot ignore the risks of volatility in capital flows that could emerge as the US normalizes its monetary policy stance as advanced countries ramp up quantitative easing. As economic conditions improve in some advanced economies, some portfolio rebalancing out of emerging market economies can be expected, and it’s likely that market volatility will pick up in these circumstances.
India has prepared better than most emerging-market economies for any such external shocks, shrinking current account deficit and increasing stock of international reserves; the higher GDP growth expected now, should help.
Should India do more to bridge inequality? Any prescriptions?
India’s robust growth, which averaged over 7% the last two dec ades, has been a major driver of poverty reduction. Nonetheless, more than 250 million Indians remain below the poverty threshold.Income gaps within India, including across states and between rural and urban population, have increased. The new government’s push toward using the Jan Dhan platform to ensure welfare payments reach intended beneficiaries is commendable. Subsidies needed to help the poor often end up favoring the middle class. That’s why the JAM Number trinity — Jan Dhan, Aadhaar and Mobile could be a step up in terms of direct income support to the poor.
Our research on India finds that growth that’s more equitable is more sustainable, and that the combination of social spending and macro-financial stability, with attention to dampening inflation, are imperative for making growth more inclusive and reducing poverty. Raising the skills of the labour force through better access to education can unlock a cycle of higher and more broadly-shared growth. Let me emphasize the important role increasing women’s economic participation can play in boosting growth. We care about this. We need more economic growth globally and there’s evidence, including from recent IMF research on India, that bringing more women into the workforce can increase growth.
Your assessment of global economic situation.
Global growth remains moderate and uneven. Despite a boost from a decline in oil prices, we expect the world economy to grow by about 3.5% this year, picking up modestly next year to 3.7 %.
The outlook differs across countries and regions. In advanced economies growth has rebounded, in the US and the UK. In the Euro area and Japan domestic demand, especially credit to private sector and investment, has yet to recover fully despite monetary easing.
In emerging markets and developing countries, growth is projected to pick up from less than 4.5% this year to a little more next year, but it’ll vary widely across countries. Among the emerging markets, and compared to advanced economies, India is the bright spot.
Key risks facing the global economy.
One emanates from what I’ve called «asynchronous monetary policy» – normalizing monetary policy in the US while most others are increasing monetary stimulus.Even if this process is well-man aged, it may result in excessive financial markets volatility as investors reassess risk perception.
Second, emerging and developing economies could face a triple hit of a strengthening US dollar, higher global interest rates, and more volatile capital flows. A stronger dollar will impact financial systems in emerging markets because many banks and companies will have increased borrowings in dollars over five years. A further risk is that the Euro Area and Japan could remain trapped in a twilight zone of low growth and inflation. These «low-low conditions» would raise the risk of recession and deflation, because they’d make it harder for many countries to reduce high unemployment and high debt.
Finally, there are increased geopolitical risks. This points to the need for a powerful policy mix that can strengthen recovery and provide better employment perspectives for citizens worldwide.
What would be the impact of slowing Chinese growth?
China’s moving to a slower but more sustainable growth path – in the range of 6½-7% growth for 2015 – is good for China and for the global economy. In the short run, slower growth may reduce growth in China’s trading partners. However, this is a tradeoff worth making as by pursuing the right policies, China will secure higher income over the medium term. Higher income will mean China will import more, proving a welcome and lasting boost to global demand.
What’s the progress on quota reforms at IMF?
IMF is a global multilateral institution where countries like India deserve bigger say. Our governance structure needs to reflect more accurately the true weight of emerging markets in the global economy. We’re working hard to achieve that-on implementing quota reforms that’d lift India to be in the top 10 shareholders at IMF.
Should there be more coordination between global monetary authorities to prevent shocks?
I’ve emphasized the need to enhance global cooperation to embrace new multilateralism. Clearly, international policy cooperation would be beneficial, as coordination problems can arise between countries. Advanced economies may need to tighten monetary policy sooner if stability becomes a concern. Such action may worsen financial problems elsewhere. There’s scope for greater international policy collaboration to minimize negative spillovers. We’ve learnt important lessons from the «taper tantrum» episode in May 2013. First, advanced economies can help with effective communication concerning normalization of unconventional monetary policies, to reduce the risk of creating large market volatility.
Second, we need broader policy dialogue among advanced economies and the emerging and developing countries; policymakers need to be aware of the spillovers their policies might create, as well as mindful of the potential spillbacks. And finally, there’s scope for multilateral action that’d provide insurance against key downside risks, supporting economies more affected by market or liquidity strains, including through the use of IMF resources.
How do you see BRICS Bank impacting other multilateral institutions?
Look at the trend: The share of emerging economies in global GDP will continue to increase, with much of the increase driven by BRICS, in particular China and India. We are optimistic about the prospects of the BRICS Development Bank and believe the new bank can be an important source for investment financing. It could play an instrumental role in addressing existing infrastructure gaps -a key constraint to growth in many BRICS economies. More generally, to the extent that new multilateral banks make decisions based on economic principles, and complement and coordinate with existing development banks, we’d view these new institutions as a welcome development.
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