India's Relations with the International Monetary Fund (IMF)
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India’s Relations With The International Monetary Fund (IMF) 25 Years In Perspective 1991-2016 India’s Relations With The International Monetary Fund (IMF) 25 Years In Perspective 1991-2016 V. SRINIVAS Vij Books India Pvt Ltd Indian Council of World Affairs New Delhi (India) Sapru House, New Delhi Published by Vij Books India Pvt Ltd (Publishers, Distributors & Importers) 2/19, Ansari Road Delhi – 110 002 Phones: 91-11-43596460, 91-11-47340674 Fax: 91-11-47340674 e-mail: [email protected] web : www.vijbooks.com Copyright © 2019, Indian Council of World Affairs (ICWA) ISBN: 978-93-88161-62-6 (Hardback) ISBN: 978-93-88161-63-3 (ebook) Price : ` /- All rights reserved. No part of this book may be reproduced, stored in a retrieval system, transmitted or utilized in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner. Application for such permission should be addressed to the publisher. The views expressed in this book are of the author in his personal capacity and do not represent the views of the ICWA. This book is dedicated to my wife Smt. Satyasree Pamulaparthy and our two beloved children Snigdha and Pranav CONTENTS Foreword ix Preface xiii Acknowledgements xvii Chapter - I The International Monetary Fund 1 Chapter - II Major Financial Crisis: From Great Depression to The Great Recession 25 Chapter - III India’s IMF Programmes—1966 and 1981: An Analytical Review 49 Chapter - IV India Circa 1991 – Origins of the Crisis 61 Chapter - V The Union Budgets 1991-96 81 Chapter - VI The IMF View - India’s Stand-By Arrangement 97 Chapter - VII Evolutionary Changes in India-IMF Relations 119 Chapter - VIII The IMF’s Article IV Consultations 1997 – 2016 135 Chapter - IX Finance Secretaries, Governors of RBI, Chief Economic Advisors and Executive Directors 151 Chapter - X My Years With The IMF 187 Chapter - XI G20 – A Decade in Multilateralism 205 Chapter - XII The Rise of China in the International Monetary System 223 Chapter - XIII Conclusion 245 Index 259 vii FOREWORD The word International Monetary Fund (IMF) evokes strong reaction among many people in India. It is viewed as an institution that interferes with the conduct of public policy in India. It is sometimes viewed as an institution that propagates capitalist ideology and globalisation to the benefit of advanced economies and to the detriment of developing countries like India. No doubt, there are some elements of truth in these reactions, but the reality is that India is itself an important member of the IMF, sort of one of owners contributing to its capital. The origin of the IMF can be traced to the Breton-wood Conference convened in 1944 for purpose of formulating post-war currency system. India was invited to attend the meeting, though it was not yet independent. India, thus, became a founder member of IMF in December 1945 even before Independence. However, since Soviet Union did not join the IMF and the Peoples’ Republic of China was not represented in the IMF, the institution was identified with the capitalist system as distinct from the socialist block led by Soviet Union. The picture, however, changed in 1980s with the expanded membership to include them. India is not only a founder member, but for some time it was the 5th largest shareholder. In addition, it had been the leader of the voice of developing countries – a voice that has been disproportionately large relative to its voting power. In recent years, India has also emerged as an important player in the global economy and, therefore, in the functioning of the IMF. IMF is in the nature of a club where member countries come together to observe some rules of the game relating to international monetary system. The members of the club are entitled to draw resources when ix India’s Relations with The International Monetary Fund needed. In some ways, IMF is a sort of lender of last resort. India has also been a beneficiary of resources from IMF in times of difficulties. While IMF is a cooperative institution, the voting power of the members is not equal. The voting power represents broadly the importance of the country concerned in terms of share in global economic activity in trade, etc. The United States of America has effective veto power. Its governance represents unequal economic and political strengths of member countries in the world. IMF is a creature of governments. Governments are political animals. A creature of such governments cannot but be political, to varying degrees. The major issues relating to IMF are: a) the governance of IMF and associated ideological biases; b) its asymmetric treatment of countries in its surveillance; c) differentiated conditionality prescribed as between borrowing countries; d) its failure in recognising the contribution of borrowers; e) its incapacity to resolve sovereign debt restructuring issues; and finally f) developing a system to replace U.S. Dollar as a de facto global currency since 1970s. There have been several controversies in regard to the IMF. Recent controversies relate to its failure in anticipating global financial crisis of 2008, its operations in Latin America, East Asia and Euro Zone. The impression has been that IMF has been somewhat soft in its conditionality in Latin America. IMF was severely criticised for the avoidable pain it imposed through conditionality in Asia. Its involvement in the Euro Zone crisis and making available resources to advanced economies with political overtones was, perhaps, the most controversial of its recent programmes. IMF is criticised for its ideological association with U.S.A. However, more recently it has demonstrated dilution of its adherence to pre-conceived ideas. This is evident from its approach to capital account management. At one stage on run-up-to-the global financial crisis in 2008, IMF did not have enough income to pay for its up-keep. As a result of great moderation, there was no demand for resources from IMF. There was a suggestion that the world no longer needs IMF and that it could be wound up since there were no takers for its money or services. However, the dominant view was that it should continue to be supported in case the need x Foreword arises. So, to get over the difficulties, gold in IMF’s stock of reserves was monetised. India is one of the countries that bought the gold. In 1991, India pledged gold to manage the crisis, and IMF gave support. By 2008, India was ready to buy IMF’s gold. These should be convincing illustrations of productive partnership between IMF and India. As it happened, IMF became a focal point for global coordination in the global economy facing prospects of serious depression in 2008, and India has been a strong supporter of multilateralism. In all these deliberations, India’s leadership including professional inputs was conspicuous by its presence. The conclusion seems inevitable. Contrary to the popular beliefs, the partnership between India and IMF has been one of great mutual benefit. Mr. V. Srinivas has done an excellent service by bringing on record in detail with insights, many of the interactions between India and IMF. The Book fills a serious gap in the existing literature on the subject by providing an updated analytical and objective account of India and IMF relationship. It should be of great interest to academics, policy makers and indeed general public too. September 24, 2018 Y.V. Reddy xi PREfacE The 2002 Annual Meetings witnessed unprecedented large-scale protests against the policies of the IMF and World Bank. The Anti-Globalization Protestors blocked Pennsylvania Avenue. The Washington Post dated September 27, 2002 said that anti-globalization protests were against the IMF programs in Brazil, Argentina, debt relief program for Africa and IMF’s maniacal support for privatization policies. The millions of protestors cried out that they were pushed into unemployment, poverty and debt by the IMF programs. 2002 was my first visit to the International Monetary Fund, as Private Secretary to Finance Minister, I was a member of the Indian delegation led by the Finance Minister to the Fund-Bank Annual Meetings. India had played several roles in the Fund, as a Founding Member and Owner; as a Borrower and then as a Creditor Nation. India’s continuous engagement with the IMF has been mutually beneficial. Some of India’s most distinguished civil servants, economists and central bankers have served as Executive Directors of India to the IMF. The Fund looks resplendent in Annual Meetings with delegations from 184 member countries, comprising of Finance Ministers, Central Bank Governors, Financial Sector Specialists, Development Economists and representatives of Non-Governmental Organizations. The Fund-Bank meetings represent the best elements of multilateralism and functional democracy. They are also the biggest gathering of top financial leadership of the world. There are several sub-components of the Fund-bank Annual Meetings–the IMFC (International Monetary and Finance Committee) meetings, the World Bank Governors meeting, the Plenary Meetings, the G7 meetings, G24 meetings, G20 Central Bank Governors meetings, bilateral meetings on the sidelines of the Annual Meetings, meetings with xiii India’s Relations with The International Monetary Fund the Managing Director IMF and President World Bank and some of the top American think tanks. The world of Finance Ministers is driven by macroeconomic stability, control of inflation, promoting economic growth and boosting investments. In 2002, India’s economic growth was on an upswing and there was buoyancy in the economic outlook. The Finance Minister presented a rosy picture of India’s economic progress at the meetings of the IMFC, G20 and G24. At the IMFC, Indian Finance Ministers, largely stayed the course with the IMF’s themes of fiscal integrity, monetary restraint and structural reform with support for trade liberalization, and exchange rate management.