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[Music]
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CPA thanks so much for joining us today
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very welcome I want to ask you a little
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bit um about the um role of um India in
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the global economic recovery um you're
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the country head for India and um you
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head up the Asia Pacific um division for
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the IMF the international monetary fund
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so tell me a little bit about um sort of
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India's role in the global economic
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recovery as you see it right just a
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quick correction I'm a deputy director
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of the Asia Pacific department and that
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covers all countries starting from
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actually India on the East all the way
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to Australia New Zealand and the Pacific
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um uh on the um uh sorry India in the
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West I should say um India's role in the
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economic recovery as you know India was
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actually quite badly hit in the
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immediate aftermath of the crisis
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October 2009 and this might surprise
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people because they they would they
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think of India as being a fairly closed
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economy but actually India is very
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tightly integrated with the global uh
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economy and particularly through the
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financial channels in other words a lot
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of uh India's investment depends on
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foreign finance and when that when the
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crisis hit initially that dried up but
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India uh couple of things happened first
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I think the policy makers were very
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Nimble in um in providing stimulus to
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the economy interest rates were cut uh a
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lot of facilities were put in place by
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The Reserve Bank of India to help credit
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uh keep flowing uh through the economy
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and then um some measures were also put
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in place uh by the uh
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uh by the Ministry of Finance through
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the public finances you have to keep in
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mind of course that India had just come
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off an election cycle so there had been
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already some fiscal stimulus in the
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pipeline which turned out to be very
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timely um therefore India's uh downturn
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if you which was very short-lived and
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has since been contributing very
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strongly uh to the global uh to the
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global uh recovery along with China
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which is the other very strongly growing
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economy most more generally the Asian
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region is growing quite strongly and it
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is leading as a region U leading the
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global
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recovery um so you said that there were
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some stimuli do you think that there are
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um that India was affected less or
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recovered so quickly from um the crisis
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in part due to some of the um Market
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controls or any of the um financial
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sector Market controls that were in
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place well yes I mean to some extent yes
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because India as I said is integ rated
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with the global economy but still
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maintains quite a lot of controls in
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particular the banking system in India
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did not become involved in any of these
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uh activities that in the end would
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brought down the um banking systems in
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the US and in Western Europe and so to
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to that extent it was completely
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insulated from the so-called toxic
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assets that were being held by these
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other Banks uh in these other countries
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and so um while there was a general
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pullback of capital as Banks
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consolidating through the crisis once
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that period was finished I think funds
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started to flow back to India you saw
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stock markets getting back the funds uh
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you saw the sensex and the other indices
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in India uh going back up so yes the
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controls and the fact that um the Indian
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economy is especially the financial
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sector is still relatively insulated um
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helped um and then of course as I said
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the policies that were put in place also
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helped do you think in spite of that
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though there still needs to be um quite
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a bit of financial sector reform and if
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so can you talk a little bit about what
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kind of reforms need to again to put
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things in perspective uh India's come a
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long way uh in the early 1990s there was
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a slew of financial sector reforms
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interest rate deregulation opening up to
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the uh Capital markets and the Indian
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authorities have a very clear hierarchy
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in how in the kind of capital that they
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want into that country um Equity foreign
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direct investment where somebody comes
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and actually you know builds a a plant
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or invests in a plant in India or and
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then debt so debt is is the lowest um
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sort of the least desirable and that's a
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that's the hierarchy that they follow
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they opened up the uh Capital markets to
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to equity and uh you have one of the um
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most successful stock markets uh in
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India both from the point of view of
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Returns on assets but also in in its
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Market infrastructure and so on but that
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said there is now a need for major
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financial sector reforms and why do I
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say that India has as you may know and
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as some of your uh viewers may know
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large needs in
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infrastructure these
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are uh Investments that require large
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amounts of money these are not small
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projects and typically they cannot be
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financed through the banking system the
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reason is that most people have their
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money in the banking system that
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so-called liability the deposits are 3
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months one year maybe 5 years whereas
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infrastructure projects typically Take 5
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10 15 years to build and then return
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assets so what what's what that is
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referred to in the uh in the jargon is
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an asset liability mismatch you have an
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asset of a much longer duration and a
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liability much shorter duration and that
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is just not beyond the point Banks
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really can't have that on their books so
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you need financial markets you need a
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corporate bond market you need debt
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markets so why while they follow the
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hierarchy now the time has come to build
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debt markets and debt markets do need
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they can be they can be generated
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through uh you know Pension funds and
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insurance funds that exist in India but
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you do need foreign funds as well to
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come in and to generate the market so
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that I think has to be the next Frontier
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for financial sector reforms in India
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this by the way is well recognized by
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the by the authorities and steps are
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being taken to do it but my in my own
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opinion I think much more uh rapid
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progress has to be made so in order to
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sort of meet its planning targets for
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infastructure what do you see the time
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frame should be for this kind of thing
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um typically these markets they take a
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lot longer to develop than um than um
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you know one imagines I turned to the
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example of Malaysia which was a country
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you know it was affected by the Asian
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crisis as you know in the late 1990s and
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it was a very Bank centered economy and
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one of the lessons they learned from the
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crisis that they faced was that they
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needed to diversify their sources of
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funding their markets for funding and to
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diversify it away from Banks and into
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different kinds of debt markets and they
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made a concerted effort to develop their
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corporate bond market it took about
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three or four years before they could
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get it going and there had to be fair
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amount of government intervention and I
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don't mean government money I mean the
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government had to become an enabler it
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had to get rid of some of the regul I
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mean had to put in enabling regulations
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had to get rid of some of the uh
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impediments but these kinds of markets
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do take a while that's that's also why
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we need to have these um the reforms
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done very soon just knowing that the
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gestation period of these reforms is
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long and the funds are needed now I mean
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we're talking about actually the
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ambition was $500 billion of
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infrastructure investment over the over
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the current fiveyear plan which actually
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ends in a year yes so um still I mean
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those are all sort of time you know uh
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slices doesn't matter if they meet or
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don't meet that it's it's they do need
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to make the do these reforms for the
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next phase of infrastructure investment
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you mentioned um you know some of the
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lessons learned from some of these other
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countries um as you look around the Asia
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Pacific region are there um other
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lessons to be learned from different
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countries um that India can kind of um
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you know take some um you know lessons
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from um and I believe you've written
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some people have said it should take a
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lot of lessons from China and um you've
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kind of said that may be true but in a
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tempered way so talk a little bit about
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that um well uh obviously CH China has
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had a lot of success right I mean um I
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think it was the um um minister of civil
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aviation who spoke this afternoon who
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said uh in India you know uh people wait
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until there's demand such strong demand
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pressure and then they take action uh
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whereas he made the contrast between uh
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indan and China by saying China they
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just build stuff even before they need
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it now obviously there's there are risks
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to both strategies um the Chinese
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strategy could be risky because you
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could be building something that in the
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end doesn't prove to be very useful but
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I think there has to be something of a
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strategy now because we've come to the
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point where India needs to generate
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large amounts of
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employment for employment you need
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industry uh the service sector which is
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grown in India tends not to be as
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employment intensive um in in in general
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they need to have industry for industry
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to really thrive in an and also to in
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for industry to thrive in a way that can
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absorb this this this huge amount of uh
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uh you know workers that are going to
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come into the labor force you need
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infrastructure so now it's no longer
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it's going to happen when there's demand
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I think there has to be a proactive and
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concerted strategy so the lesson I
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suppose the lesson that one one can
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learn from China is that you know what
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what how did what are the main
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impediments that India faces and how did
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China for example overcome them you'll
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hear often times people saying well
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India is a democracy China is not
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nevertheless there are some lessons that
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one can learn I I I quoted cited the
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example of Malaysia where they made a
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concerted effort for the government to
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play an enabling role in generating a
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corporate bond market there are lessons
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that can be learned there as well so
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all over the asia-pacific region in the
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successful countries um you know Korea
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is another one which which uh has
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succeeded in for example they went
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through the demographic transition that
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India is going through in the 60s and
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70s and really capitalized on they went
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from a being a country that had a lower
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per capita income than India in the
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early 60s to where they are now which is
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an oecd country Indians tend to be um
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very gung-ho about their country's
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prospects um you know they're very
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excited and optimistic uh obviously do
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you at the IMF see any risk factors that
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could undermine um this sort of success
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story this optimism and if so what are
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they first let me before I go to see
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telling you what I might what might be
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uh obstacles I have to say in general I
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share that optimism it's very difficult
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not to be optimistic about India you
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have as I said the young we're going to
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have the youngest labor force um in the
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world U for the next 50 years um um
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there is um that typically countries
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that have had that kind of young Dem
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that demographic transition have
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succeeded um you have an extremely
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vibrant private sector and we're seeing
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evidence of that you know all over the
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place today in this conference um a
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private sector that's that seems to have
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excelled despite the government uh in
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India so it is very difficult to be uh
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to be anything but optimistic uh about
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India but there are some constraints and
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there are some risks number one um is is
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inclusion this is a this is a statement
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that this government has run on its one
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two two successive elections based on
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this platform of
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inclusiveness we are going to get to the
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point where the income gaps are so large
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that we risk having some kind of social
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really serious social consequences so
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this government is completely right in
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saying we need to pay attention not only
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to growing the pie but also making sure
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that P is distributed more
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evenly but the but the pie has to grow
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first so you know I mean there are there
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have to be policies put in place to grow
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the pie the other risk I see is in
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India's large fiscal
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deficits we have deficits that are close
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to 10% of GDP now we have a debt of 80%
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of GDP we spend significant amounts of
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the revenue that we collect just paying
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off the just servicing the debt when you
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have 350 million people living in you
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know below the poverty line that's the
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size of the US population living below
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the poverty line I think we again I come
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back to this issue of sort of
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inclusiveness but it's it's if you're
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not able to provide for your people and
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and every year you run a deficit of 10%
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of GDP which means you're spending 10%
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of GDP more than you're taking in sooner
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or later people are going to say you
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know where what's what's the effect of
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these of these deficits that you've been
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running so I see I do see uh a a
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stability risk from the fact that they
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have these deficits not in the same way
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for example as some of these other
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countries Greece or turkey or some some
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other countries because India doesn't
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borrow in foreign
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currency this has been this has sort of
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saved it from a violent crisis but there
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is a downside the downside is it's a
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small it's it it you're basically eating
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into your own growth potential right to
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dial it back into sort of a macro
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perspective the IMF has been um
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criticized at times for you know
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conditional loans things like that we're
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seeing some um pretty um interesting
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things happening in say Greece Spain Etc
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um what do you think you know what kind
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of global changes need to be made um to
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sort of avoid that kind of thing do we
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need sort of a a global Consortium all
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what happened in Breton Woods a long
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time ago do we need some kind of a um
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you know Global intervention and and and
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what do you see as um I do we need
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another Breton Woods uh probably not I
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mean you remember that the brettonwoods
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meetings gave birth to the IMF and the
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World Bank so the institutions exist
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right and the institution I mean they
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are uni what what is unique about the
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IMF and other other organizations
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including the World Bank is we have near
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Universal membership we have 186 there
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are there's no other International
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Organization outside the UN system that
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has that kind of
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legitimacy uh in terms of you know just
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just coverage of membership so the the
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the institution exists um
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conditionality is is very much a part of
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the design of the imf's lending program
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the IMF as you as you may know basically
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gets its funding from quarter
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subscriptions so every country that
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becomes a member is like a membership
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fee it's the only money that we have
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from which we run not only our our own
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operational budgets but also for Lending
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and it is a basically a fund that has to
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be paid back in order for us to be able
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to make loans for to other countries
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that when they need them the
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conditionality is designed to ensure
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that we're repaid that's essentially
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basic if I were to boil it down to the
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barest simplest terms um over the years
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we have the design of conditionality has
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changed at times it's been much more
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intrusive and and than it is now there
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is a move and and you can check it on
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the IMF uh website there is now a
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concerted effort and many reforms that
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have been put in place
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to make sure that the conditionality
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that's imposed is really relevant for
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the problem that we're trying to fix and
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not I think as it had happened in the
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past sort of all the bells and whistles
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that went along with it finally to your
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question about what needs to change um
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the quota subscriptions were determined
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are determined on the basis of your
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economic and uh strength and it's you
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know a formula that's depends on a whole
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bunch of things well the world has
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changed a lot and you can say shifted
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Eastward and and the quarter
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subscriptions have to be shifted now to
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reflect that change in um
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strength the trouble of course is that
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when you're trying to change a fixed you
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know you're trying to shift quarter
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shares around somebody wins and somebody
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loses and that makes it much that makes
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it very difficult to implement in this
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case the one the countries or group of
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countries that would tend to be the
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losers would be the smaller Western
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European countries the ones that tend to
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be the winners are emerging markets in
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general but particularly emerging
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markets in Asia China being one of them
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but but others as
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well those governance changes and th and
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we we call them in the fun voice quota
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and voice have to change and that is
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going on our managing director has
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pledged that there will be a reform of
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these um before the end I think by early
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2011 so in in a year uh and all
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preparations are being made to to that
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effect thank you so much for joining us
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thank you very much
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for
