A. Vasudevan

India must be more proactive at the forthcoming annual Fund-Bank meet, using its membership of inter-governmental groups to promote its interests as much as those of other emerging and developing economies. It should revisit the issue of quota formulas with colleagues in the Group of 20 and stand firm against proposals for SDR allocation or distribution, apart from taking up initiatives on surveillance, says A. Vasudevan.

IN LATE September and early October, the International Monetary Fund-World Bank will hold several meetings, including the Annual one. The inter-governmental groups also meet at this time. This opportunity should be used by India's Finance Minister to move away from the traditional modes of intervention and speech-making and to take definitive positions on international financial issues.

India should use its position as a member of a number of inter-governmental finance groups to provide new perspectives on issues that promote its interests as much as those of other emerging and developing economies.

India has been advocating substantial SDR (Special Drawing Rights) allocation along with other developing countries and had, in fact, made some proposals to increase the amount and use of SDRs but without avail.

Its first proposal, in the 1970s, for SDR/aid link did not get any support. In 1986, India's Executive Director proposed that industrialised countries allocate their SDRs for purposes of development in the form of an overdraft facility with a condition that the reallocated SDRs should be returned by their users to the creditors within three years.

In 1999, a senior Indian official proposed that the Articles of Agreement be amended to allow the IMF to issue SDRs to itself for use in lender-of-the-last-resort operations, subject to a cumulative limit on the total volume of SDRs that the Fund could create for this purpose. Now that global liquidity is sufficient and international markets are active, India should not support proposals for SDR allocation or distribution.

Similarly, India should also not go with the developing countries' position that industrialised countries should fulfil the UN target of foreign aid of 0.7 per cent of their GNP. The arguments for aid increase have become weak, mainly in view of the explosive expansion of private capital markets and the weak fiscal positions of many industrialised countries. In any case, the plea for larger aid has been repeated for over 25 years without any positive impact.

India should, on the other hand, now take new initiatives, some of which are mentioned here for illustrative purposes.

First, the movement towards economic convergence in terms of real per capita income among nations should receive top priority to reduce the relative economic distance among country groups.

For this purpose, countries need to be grouped not in the conventional manner, as industrialised economies (IEs) and developing economies (DEs), but in four categories of IEs, emerging market economies (EMEs), transition economies not categorised as EMEs (TEs) and the rest of the economies (ROEs).

The four groups would form an inverted pyramid, with IEs at the top and ROEs at the bottom. Convergence entails that ROEs record the highest growth rates, followed in a descending order by TEs, EMEs and IEs on a sustained basis over a long period.

Convergence is not a Utopia. It is achievable, going by Goldman Sachs' recent projections that Brazil, Russia, India and China (BRIC) together would overtake the six major IEs by 2039, based on assumptions relating to economic size, demographic distribution, patterns of global demand, appreciation of the exchange rate and the countries implementing sound economic policies and supportive institutions.

These projections do carry downside risks, but they could help countries reduce vulnerabilities through deliberate policy efforts.

Convergence requires economic cooperation to equitably share international economic prosperity. Assistance — technical, financial and technological — that countries in the higher-income groups could provide for the lower-income groups of countries that are implementing the required institutional reforms is one avenue of cooperation.

Financial assistance need not be in the form of loans or grants but could well be in debt reduction or swaps for debt or access to domestic markets, or even sharing of technologies in/research into new knowledge areas.

Each country group would have to support the one below it in the pyramid. The form of support, however, is a matter on which more policy research is needed.

India could well take the members of the IMFC into confidence in suggesting that it would support any research that could be conducted on the subject by the IMF staff.

Economic convergence also implies the need to have crisis prevention measures.

In the event of a crisis, how could one utilise without delay the unused contingent credit lines at the IMF? India's position on the activation of such credit lines is unknown, but initiatives are needed.

Besides, it has to thwart the efforts currently afoot to allow crisis-hit countries to have access to the Fund's resources only if their past record is considered appropriate and ensure that the basis for countries' use of Fund's resources would rest on the soundness of adjustment programmes and commitments to undertake institutional reforms.

For international financial institutions to effectively contain spillovers and contagion, there is need for a much larger capital base.

In the past, India made several suggestions for revisions of formulas for Fund quotas but did not succeed in getting support from most countries. But this should not dishearten India in revisiting the quota formulas with colleagues in the Group of 20 (the systemically important countries) and if necessary in the IMFC in order to promote the objectives of economic convergence and strengthening financial stability. For crisis resolutions entail costs.

On the other hand, convergence leads to `balanced expansion' of international trade. IEs alone need not bail out crisis-hit countries with large financing packages: other countries too could chip in. Let me suggest how this could be worked out.

An interest-bearing deposit account could be opened for a year in the Fund, into which members with strong balance-of-payments positions could place funds up to, say, the amount of their present quotas.

Since such contributions reflect the countries' commitment to international financial stability, `weight' could be given to countries that contribute while working out the quota amounts.

Besides, the contributors could opt to convert their deposits into quotas to the extent of quota allocated to them once it is decided to increase the quota base of the Fund.

In case the quota base is doubled, the deposit account could be closed down. Till the time the quotas are not adequately raised, the Fund could use the deposits to take care of crises and unsustainable debt positions. The interest on deposits could be determined on the basis of the investments made out of the account.

India's representative at the annual meetings could take up other initiatives relating to fair and symmetrical surveillance and improvement of compliance to international standards and codes. He should also discourage the Fund and the Bank from forging relationships with civil societies and parliaments of sovereign countries.

India can count on persons with public policy orientation and experience in dealing with international finance issues to work with and advise persons in the Finance Ministry and the Reserve Bank of India.

These are not necessarily pure theorists or econometricians. One must remember that, after all, the solution to the debt crisis in the 1980s came from such specialists working with the US administration.

It would be a tough call, though, to accept this challenge and to separate the chaff from the grain while picking up such specialists.

(The author, a former Executive Director of the Reserve Bank of India can be reached at: asurivasudevan@hotmail.com)

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