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Transcript of Media Briefing by Deputy Chairman, Planning Commission on India at the G20 Leaders’ Summit in St. Petersburg

September 06, 2013

Official Spokesperson (Shri Syed Akbaruddin): Good morning friends. We have here with us the Deputy Chairman Mr. Montek Singh Ahluwalia to brief you on G20 meeting on behalf of Prime Minister.

I will request the Deputy Chairman to make a few opening remarks and then he is available for a very short time for any questions that you may ask. Because there are bilateral meetings in the morning, we will have to leave early. I would request any of you who would be asking questions to be specific and ask just one question each.

          With those opening remarks I would request Mr. Ahluwalia to make his opening remarks.

Deputy Chairman, Planning Commission (Shri Montek Singh Ahluwalia): Thank you very much.

          We are in the middle of the session. I believe the Prime Minister’s speech has been distributed. He will…(Inaudible)…on two occasions based on the speech. The global economy and some of the international stuff he has already touched upon in the opening session yesterday. Basically the leaders are speaking in different groups. But he has said this and his speech is distributed. So, I can actually answer any question on the speech itself.

Most of the session on the economic side was taken up by the issues of the global economy, what we need to do, what steps can be taken and that sort of thing. Of course it is going to…(Inaudible)… today. I do not know if the declaration was going to be released today. So, you have not yet seen that but based on the PM’s speech I can give you a sense of what is happening.

          Okay, questions.

Question:There is a paragraph in his speech yesterday where he says that in current global conditions flexibility in exchange rates need not necessarily act as a self-correcting mechanism and help calibrate capital flows and, therefore, growth.  Can you elaborate on this? It seems that he is suggesting that some of the regular market forces, self-correcting market forces, are not working at this time given the unconventional monetary policy.

Deputy Chairman, Planning Commission:  I do not think that issue is actually connected with unconventional monetary policy. That issue is really connected with the fact that if you are going to have surges of capital flows up and down - whatever is the reason, in this particular case we think it was triggered by market anticipation of the taper, there is a lot of thinking - PM was really referring to the fact that people are now beginning to question the proposition which used to be argued at one point that if you want capital mobility, and you want an independent monetary policy, then the trilemma is solved if you just allow the exchange rate to fluctuate.

That is perfectly all right if variations in capital flows are modest and actually reflects fundamentals. It just means that if for the next few years you are not going to get less capital and the market is signaling that, then you take whatever action is necessary and within that framework you keep the exchange rate flexible. But if markets are subject to very large flows as a result of a lot of liquidity sloshing around, a lot of which would then get moved not because of judgments of fundamentals but sometimes judgments of the dynamics of what is going to happen next week and next month, then many people in the academic world are questioning whether the old notion is okay. The limited point here is that you may, therefore, need to intervene at one point.

The other is, you may need to try to be sure that you do not exacerbate volatility. The extreme view of exchange rate flexibility was that you just do not intervene. Theoretically, the exchange rate flexibility people could actually argue that you do not need any reserves at all. I think it is recognized now that that sort of view of exchange rate flexibility is not a valid view. But at the same time, I think the view is that you must have a flexible exchange rate but you have to keep judging when is it that the capital markets are overreacting.

          The problem here is, it is all very well for you to judge that they are overreacting but the judgment is most effective if it is done in a coordinated manner, particularly when monetary policy changes are triggering the capital flows. That is what he was really trying to get at.

There is a very good article by a lady Professor - I forget her name, it is Elizabeth something - from the London Business School which is being talked about on everybody’s blog and she has outlined all this.

Question: How do you…(Inaudible)… emerging economies coordinate? Are there some practical…(Inaudible)…?

Deputy Chairman, Planning Commission: I think this is the crux of it actually. A couple of points need to be made. The first point is, and I think the Prime Minister makes it in his speech, the resort to monetary policy was not part of the G20 coordination process. When the G20 originally got going, the initial consensus was, a fiscal stimulus is needed. There was some debate but they all agreed to that.

Then around about Toronto, I think in 2010 or so, there was a perception that in the developed countries, the fiscal expansion, the rise in debt had gone too far and they need to go back to fiscal consolidation. I think in Toronto the signal was very strongly that the time has come for fiscal consolidation. And actually the Prime Minister at that time had made this point that - do not you think at a point when private deleveraging is taking place and credit is also constrained, that if you go in for a very strong fiscal consolidation, it will lead to a short-term depression of economic activity.  If you look at the Prime Minister’s speech in Toronto, it is there.

There was a debate, there was a consensus, and we were in any case of the view that we must gradually taper down. The view of western countries at that time was that maybe the time for consolidation is very strong. Now, the negative effects of this demand compression were known. But at that time the expectation was that lot of structural reforms are going to be done, in Europe particularly, and those structural reforms are going to transform the situation, they are going to lead to an increase in productivity, they will lead to a revival of private investment, etc. And I think in the PM’s speech there is a sentence which says, ‘without the expectation’, but it did not happen. And so, monetary policy was resorted to.

We did not actually object to the easing of monetary policy. I think the Prime Minister has said that when monetary policy was loosened, it helped some countries to finance the deficit. That includes us. In other countries which did not want to run a big deficit like Brazil, it led to a huge currency appreciation. Mr. Mantega, the Finance Minister of Brazil, that is when he started using the term ‘currency wars’. So, the loosening also had some problem.

          First point is, Mr. Bernanke says we will have to wind this down. That is not a surprise. What is surprising is that the markets reacted the way they did. This is one of the problems with monetary policy coordination. No country locks itself into a monetary policy as a result of an international negotiation. But I can imagine, by the way most of us knew that this reversal will occur. One problem is that markets can suddenly overreact much beyond what anyone could think. And it is not very clear how you would handle that problem.

There are also technical problems which the Prime Minister has mentioned. Some central banks have legal mandates, and the legal mandate does not include looking at after-effects. The concern about after-effects is not purely what I would call a concern for well-being of others. It is also a concern for well-being of everybody including oneself. Because it is all very well to say why I should I care about the spillover effects of my policy, the point is that you are doing it in a coordinated way, so, you are going to coordinate other peoples’ spillover effects. So, while you look as if you are disciplining yourself here, you may be benefiting elsewhere. That is why fiscal policy is being coordinated.

          I think the Prime Minister recognized that this is so. I think this is also now well appreciated and we hope that the declaration will contain some acceptance I hope that this is an important point. But at the same time let us realize that when you are dealing with international economic management, between a strong dialogue and a little bit better understanding and a predictability of what is going to happen is a big gap which is nobody’s fault.  But at least the dialogue will be a lot stronger.

Question: I want to ask you about the Prime Minister’s mention on fiscal policy. The speech seems to suggest that if developed economies are entitled to unconventional monetary policies for whatever reasons, given the circumstances India is entitled to its own fiscal elbow room and, therefore

Deputy Chairman, Planning Commission: There are no entitlements here. Let us put it this way.

Question: Sovereign rights!

Deputy Chairman, Planning Commission: All countries, we have the sovereign right to consult amongst each other and come out with a mutually better situation. That is true for us: that is true for them also. 

          One of the newspaper stories gives, to my mind, a slightly over aggressive, sort of attacking the developed countries picture. I think the Prime Minister’s speech actually is very carefully worded. I do not think he was attacking the developing countries, but he was kind of zeroing in on what is a complex problem, recognizing that there are a lot of technical difficulties and trying to create a consensus that, look let us see how we can move forward.

The key thing here is reserve currency. India’s monetary policy is not going to have any impact on anybody other than India. I am sure they would be happy if Dr. Raghuram Rajan tells them in advance what he is going to do, but we are not a systemically important country from the monetary policy point of view. But the reserve currency countries are. Which really means that if you want to organize yourself, then certainly the Yen, the Euro and the Dollar - and I think increasingly the Renminbi because Renminbi is not yet a reserve currency because it is not a fully open capital account but it is the Chinese intention to make it more of an international currency. So, these are the currencies where monetary policy will affect economies, and it will have some spillover effects that people need to know about.

Question:We were told by the Finance Secretary that there will be a strong statement. You are now tapering it a little bit by saying that it will be reflected.

Deputy Chairman, Planning Commission: Sorry, what will be a strong statement?

Question:From the G20 about the spillover effects, especially …

Deputy Chairman, Planning Commission: I do not want to prejudge what the G20, I mean we are very clear on what we have said and I am certainly hoping that there will be a reflection. Let us be clear. The purpose of the G20 is to enlarge the area of consensus. So, I am a little concerned that the Indian press says the Prime Minister is attacking the developing countries and then the next headline is developed countries succumbing to the attack. This is not the tone in which international negotiations are conducted. I believe by the way that the position that India is taking is very much supported by many other countries, not just developing. But there is the other side of the picture also and we have to keep that in mind.

Question: Since you are the Second Sherpa and you were there in that room, did Syria get reflected in any way because that is uppermost on most world leaders’ mind?

Deputy Chairman, Planning Commission: Syria was not discussed during the main conference but it did come up at the dinner. Since this is a continuing matter, I am happy to clarify what our Prime Minister said, and since these discussions will continue bilaterally I would not comment on what others have said.

Essentially, President Putin asked the Secretary-General to speak on Syria. The Secretary-General used the opportunity to actually explain what was happening, that they have mobilized a scientific team which actually is operating in very difficult circumstances, collected a lot of evidence - this, from what I gathered, really relates to human tissue samples from either people who died in the attack or those who are affected but are not casualties yet - and these have been sent off to different laboratories in Europe. He did not mention where in which countries. He said that they are hoping to get results as quickly as possible.

I take it that what these results will establish is that there was use of chemical weapons. So, from the UN point of view that proposition will get resolved based on evidence. Many people have asserted, that was there.  But really if you are talking about legitimizing action, you do need to have some scientific evidence. Therefore, the UN stepping in is actually a very good idea. And he did say that he would make the findings known to the Security Council and to the membership generally. So, we will get information.

          As far as Prime Minister’s own statement is concerned, he made a number of points and I just want to make sure that I do not miss any. One is that we condemn the use of chemical weapons whether in Syria or anywhere. We do condemn them. That is point number one.

Second, we need to be certain of the facts particularly keeping in mind past experience. We should be certain of what has happened even if probabilities point in a certain direction. I took that to mean that we need to wait to see what the UN inspectors come up with. Hopefully they will come up relatively soon. Prime Minister also said that whatever action is taken should be under UN auspices and not outside the UN framework. He also said that we are not in favour of armed action that is aimed at regime change, but clearly if there is a violation of international law, then the Security Council should authorize whatever action is necessary.

These were the main points that the PM made. It is quite possible that discussions are actually continuing bilaterally and may even continue for the rest of the day. I do not know whether there will be any reference to that in the communiqué.

Question:…(Inaudible)…

Deputy Chairman, Planning Commission:I think they must be having a briefing. So, why do not you ask them?

Question:…(Inaudible)…

Deputy Chairman, Planning Commission:I think that is not fair.

Question: Despite what the Prime Minister said really about the impact of global monetary policies on India’s economy, global economy, just before the informal BRICS dialogue, the Russians and the Chinese both said, they went on record and it was reported by Reuters, that what is happening in India is really India’s problem, and that they need to tackle their weak fundamentals, and it is not really linked to what is happening elsewhere. Do we react to that yet?

Deputy Chairman, Planning Commission:I have not seen that statement. But let me say, the Indian position is not that we had no problem and then this happened. I think if you look at the Prime Minister’s speech, he himself says that we have too large a current account deficit. Mind you, I will go into that in a second, domestically on any number of occasions I think what the Prime Minister has said is that there were domestic problems that need to be addressed. In any country it is never smooth sailing. Problems arise, you have to address them. So, that should not be a surprise.

          But it is definitely our view that the exchange rate volatility that we faced, the sudden and sharp exchange rate volatility that we faced was actually triggered by the change in market expectations. In some sense you can say that had this not happened, had markets been totally stable, there would have been an India-specific reaction over a different period of time. But the extent of the overshooting of the rupee was not at all unconnected with the high volatility globally.

The Prime Minister may or may not have said but I think the Finance Minister has recently said and many of us have said that some depreciation was actually justifiable. There has been a lot of discussion on that. The problem is, when it is happening, government officials naturally do not want to say how much is justifiable. But in retrospect let me just share with you that I have seen a lot of studies on what is the depreciation that is justifiable. That basically depends on whenever your inflation rate is higher than that of your competitors, there is an element of real appreciation that is taking place.

If the current account deficit is not actually improving, then that is a problem and you need to address it. So, you calculate what is the correction factor. And that depends on what is your base level that you use, how many currencies you compare with, what is the price index you use both for yourself and other countries. Different estimates, therefore, come out differently. I have seen a number of estimates that vary from as low as Rs.59 to the dollar to something like Rs.65. The highest I had seen was Rs.65 to the dollar. When the Rupee went to 69 or something close to that, in my view that was clear overshooting. I think that overshooting would not have happened if we were not in the middle of a global sort of currency reaction.  

Question: There are a couple of points that we would want you to clarify. One is, the entire issue as far as our currency swaps are concerned - and there has been some commentary about it including the 100 billion dollar currency reserve arrangement, and the fact that the BRICS statement said that it will be reviewed or tangible results will be had only by the time of next visit - how does it at all benefit India? Is there some sort of horizon that we have in mind for operationalising any of those aspects?

Deputy Chairman, Planning Commission:That is a very good question and I just want to clarify my view on this. I have not checked this with the Finance Minister. I do not believe that the current currency swap discussions are meant to trigger putting something in place that will enable us to handle what is the current, actually the current problem seems to have stabilized already. But the purpose of currency sharing arrangement is really building long-term kind of safety nets. The present international consensus is that because of volatility you have got to have some safety nets.

By the way, the very fact that they say that means that they are not expecting that all problems will be taken care of by currency depreciation. If the exchange rate flexibility was a solution to all problems, you do not need any reserves at all except you have got to have some cash if somebody needs a little bit of money. The international view is that you do need reserves. So, the first safety net is your own reserves. I think we have a lot of them – 280 billion dollars.

          Second safety net is regional currency arrangements. To my knowledge, the only one that we have in place is with Japan. The one that is now being discussed is the BRICS one. Hopefully they will agree, they have sort of agreed on the number and we more or less know. I saw news reports which I am not denying which give the right sort of numbers on how much is going to be contributed by different countries.

What is not yet known fully is what are the terms on which you can draw from the currency reserve. The usual terms are that up to a certain amount of your own, you do not actually make your contribution into a fund. You keep it with you but you are obligated to deliver on that promise. You can draw a certain percentage of that without any question. Generally beyond that, at least that is what they have in the Chiang Mai arrangement, it is done in parallel with the IMF. So, the IMF arrangement gives some indication of a corrective policy and you go to the IMF with a little bit of strength because you say, we need so much money and this much we are getting from our currency arrangement and you give us the rest. So, that puts a little bit of pressure on the IMF that look you should be helpful, which is good.

          We are not members of the Chiang Mai initiative. But when the BRICS one comes into play, which looks very likely now, we will be. But that is not meant to be, we are not counting on that to take care of the current problem at all. So, that is the important thing.

Question: Is there an interest payment involved in the swap arrangement?

Deputy Chairman, Planning Commission:I think when you draw you pay some interest. Again that is a matter of detail.

Question: I just want you to clarify this. PM’s statement yesterday as articulated by Foreign Secretary says that he is very happy with the currency arrangement especially in the context of the current …

Deputy Chairman, Planning Commission:Let me explain. Markets anticipate things. So, markets factor these things in.

Question:…(Inaudible)…

Deputy Chairman, Planning Commission:Anything one does should be linked to some benefit. But what I am saying is, I do not expect. With 280 billion dollars of reserves I do not expect that we will be drawing on a currency swap arrangement unless there is a radical change in the situation. So, in the current situation this is like an extra buffer. And you know markets take note of it. That part is certainly good.

Question: That is a leverage point I think …

Deputy Chairman, Planning Commission:Sure.It is exactly the same effect as an increase in the IMF quota. If the IMF quota were doubled tomorrow, we would move some of our reserves into the reserve tranche of the IMF. So, our reserves remain the same. But our borrowing capacity from the IMF suddenly shoots up. Not that we are going to use it, but it has a positive effect, calming impact shall we say.

Question: I would like you to come back to that dinner meeting where Syria was discussed.

Deputy Chairman, Planning Commission:I thought you would!

Question: Was there any timeline indicated by Secretary-General as to when report is expected? Secondly, was there any consensus among the leaders that till reports come US or anybody else should not launch any military action against Syria?

Deputy Chairman, Planning Commission:I do not want to speak for other leaders, that is not fair. But my impression was that virtually everybody appreciated and applauded what the Secretary-General is saying. The Secretary-General did not actually indicate timelines of when the reports would be available. But he did give the impression that it is a matter of days. So, if you were to ask me, is it five days or fifteen days, I would not know. But I certainly got the impression that it is somewhere in that range and not 180 days …(Inaudible)… I do not remember anyone specifically saying that it is too long.

Question:…(Inaudible)…

Deputy Chairman, Planning Commission:That is the impression. What he said is, normally these things take several days and we are trying to get it done as quickly as possible. So, I got the impression that it is going to be a matter of a few days. That is it. I do not remember anyone, therefore, saying that they cannot wait for these results. But the issue is not the results alone. The issue is the UN process. That can be a different thing.

Question: When the Prime Minister suggested that the issue should be resolved under UN, were many countries were taken up with this idea?

Deputy Chairman, Planning Commission:Let me put it this way not wanting to comment on other leaders, this is not the unique Indian position. There were several who took the same view.

Question: Last week in Delhi, the Principal Advisor to Finance Ministry, Mr. Deepak Dasgupta, said that there was a plan under way and he said it will be operationalised in a matter of days and not even weeks, to make a coordinated intervention in currency markets by emerging economies. Was there ever a plan of this sort? What was the shape of this plan? Did you hold discussions in this regard with other countries?

Deputy Chairman, Planning Commission:My understanding is that it has been clarified by the Finance Ministry, perhaps Dasgupta was misreported which with all respect does happen every now and then, I am not aware of any plan nor do I think is such a thing feasible. But I do believe that maybe the then Chief Economic Advisor and now our central bank Governor, had said that he was never…(Inaudible)… That is what I know.

Official Spokesperson: Last question to you since you are the only lady with us.

Question: We already have a currency swap agreement with Japan of 15 billion. That is in place but there is a lot of confusion on this.

Deputy Chairman, Planning Commission:That is already in place and my understanding is that it is about 15 billion dollars.

Question: So, we can draw down any time.

Deputy Chairman, Planning Commission:That is what it means, having an arrangement.

Question: No, because there was talk yesterday there will be a further…(Inaudible)… Just a clarification.

Deputy Chairman, Planning Commission:I must assure you, I am not the right person to comment. It is really for the Finance Minister and the Reserve Bank Governor. I do not think that we are in a position where we are looking to see from where we can draw down because with 280 billion dollars in reserves, you only start drawing down currency swaps after you use quite a lot of your own resources.

You have a right to draw down. But drawing down a currency is simply deciding to pay an interest on a loan and keep collecting interest on your investments in the reserves. So, it is really not such a big deal. It is really in my view, given the present situation, looking ahead. I think it is important for us to build up this second line of defence. Now that internationally it has become an established principle, we should have more of them and expand the ones that we have got.

Question: One clarification on India’s contribution.

Deputy Chairman, Planning Commission:Ah! You are not the only lady, there are two. Welcome!

Question: India’s contribution to this currency pool, where is it going to come from? Is it going to be the part of our …

Deputy Chairman, Planning Commission:You mean the BRICS currency pool?

Question: Yes.

Deputy Chairman, Planning Commission:This is called a reserve pooling arrangement. What it means is that the Reserve Bank of India, let us assume that the newspapers are right and that our contribution is whatever, 18 billion, …

Question: We have got a release yesterday.

Deputy Chairman, Planning Commission:Okay.  I mean it is not yet done. I think the BRICS Summit will actually sanctify it. Eighteen billion - what does it mean? What it means is that the Reserve Bank undertakes that it becomes liable to the other currency pool people to allow up to 18 billion to be drawn.

Now every country in the reserve pool has a certain right to draw. As and when they trigger that right, if 18 billion is about 18 per cent of the total size, whenever a country draws ‘x’ billion, 18 per cent of that will be given by our Reserve Bank to the country. And then the country will repay it in dollars with whatever little interest rate that there will be. So, it is like a contingent liability on your own reserves. Obviously you do not expect every country to be making such a demand but you keep that in mind in your calculations. That is all.

Question: But you do not put that money aside in an escrow account?

Deputy Chairman, Planning Commission:No. It stays with you. It is a mistaken notion that you have got a pool. For example, when we give money to the IMF, the hard currency contribution, there we do not have the money, we give it to the IMF, we gain in the IMF reserve currency position which is included in our reserves. We have an absolute right to get all of this back plus a little more. And it is the IMF’s job to manage the pool so that for countries that contributed money and need it back, there is enough liquidity to meet them. But that money is managed by them. This is not going to be the case in a currency reserve arrangement.

Question: I am the third lady on the floor!

Official Spokesperson: Certainly.

Question: I just wanted to get your general impression from last night’s dinner. Did Syria issue dominate the dinner as opposed to economic issues?

Deputy Chairman, Planning Commission: They had a broad ranging discussion. I think Angel Gurria, the Secretary-General of the OECD opened the discussion and talked about some of the economic issues that are before the Summit. And then the Secretary-General spoke on Syria. The dinner went on for a very long time. Actually I had to come back before it finished. So, I do not know what happened after that.

But you are right, the majority of the time perhaps, and it is understandable because all these other issues they are discussing in the plenary forum all the time. So that was the position.

Official Spokesperson: Thank you very much. With that we come to the end of this event.

(Concluded)

 

St. Petersberg

September 6, 2013 



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