Provisional Transcript:
Your Royal Highness, Crown Prince Salman Bin Hamad Al Khalifa, Your Highnesses, Excellencies, ladies and gentlemen, Dr John Chipman, it is a great pleasure and privilege to kick off what is obviously going to be a rich feast in the next couple of days. It is also a bit of an awesome responsibility, because I looked at the subjects you are going to cover with a lot of real experts, so I cannot help feeling you do not really expect me to get into any of these things in depth. Perhaps I can simply put forward something that will be an appetiser and maybe raise a few issues that others who are more knowledgeable will go over in the next couple of days.
In that spirit I will structure my remarks around three broad issues. The first really is my perception or perhaps our perception in India of what is happening in global economic and financial trends and whether it has been affected by the recent financial crisis. Secondly, I would like to say a few things about India. It is the only part of the subject where I have a comparative advantage. I would like to say how we are doing and how we expect to react to what is happening. Finally I will make a few comments on global governance as it is emerging.
As far as global economic trends are concerned, since we are here in Asia, it has been true for quite some time that growth rates in this part of the world have been significantly higher than in the rest of the world. If you go back 10 or so years, it was really the countries on the Pacific Rim that were showing those high growth rates, but I think what has happened in the last 10 years is the higher growth potential of Asia has become much broader. I am happy to say that India has fully participated in that process, but we are not the only economy that has been doing well. China has been the fastest growing for quite some time. India’s growth rate has moved up to be second after China and many of the other countries have been doing quite well.
The issue that arises is what the financial crisis has done. We have been talking about the shifting economic centre of gravity towards Asia. Have things been altered by what has happened in the last two years in the industrialised world? The answer is both yes and no. I think the basic supply‑driven capacity of Asia to grow rapidly is not altered. I think we are seeing in this part of the world the result of growing human resource capacity, very deep private sector capacity, which has been unleashed virtually everywhere and also an institutional development, which is broadly supportive of market‑led growth and that has not changed.
What has changed is the nature of the constraint that we think the industrialised countries or many of them will face, because, although debt problems, fiscal problems were looming in the industrialised countries even earlier, their resort to a fiscal stimulus of a very large order in the last couple of years has drawn attention to the seriousness of the debt overhang. It has also drawn attention to whether it is going to be possible to get back to fiscal sustainability in the industrialised countries. In the middle of the crisis I think it was an achievement that people were not too preoccupied with concerns about fiscal issues and a policy of stimulus was actually implemented. I think that clearly worked.
It is only two years ago that the Financial Times was running a series on the future of capitalism. There was a general atmosphere of doom and gloom that maybe the world was going to change in an unpredictable way. I think that has been overcome, but I think people do now worry about the growth potential in the industrialised world, given the nature of the fiscal adjustment that has to take place, certainly in the US, also in the UK, in France and as we have seen with the recent crisis in Greece there are a number of other countries for which this will be true.
I am assuming we have avoided a financial panic. Hopefully the world will stabilise with what has been attempted, but it is quite clear, if it does actually stabilise, they will have to take steps to bring the fiscal situation onto what looks like a credible path over the next few years. Right now the scale of that adjustment is very large. I do not think anyone questions the scale of adjustment, but it is not clear whether anyone has signed up to take the sorts of steps that will be necessary to bring about that adjustment. The Greek crisis has probably shifted the balance in policy making towards having to bring about fiscal stability sooner rather than later. That basically means growth rates in the industrialised world are likely to slip rather than go higher. I think, therefore, we are talking about relatively slow growth in the industrialised world.
In the Asian countries the strong positive is that on the supply side the capacity to grow rapidly is not affected. I think there are problems of imbalances, which hopefully can be dealt with over time. Certainly as far as India is concerned we are not contributing to any imbalance, because we are running a current account deficit at the moment and expecting to let that deficit widen, because it is at a level where we can finance it providing capital flows hold up. The most important thing is whether we can have a sufficiently stable global financial environment to prevent a disruption in capital flows.
About two or three years ago the focus was very much on supply‑side constraints. All of a sudden this has shifted to managing the demand side. Hopefully we will come to some resolution of this and I am sure you will be discussing this in some of tomorrow’s sessions.
How does India look at this world? Before the financial crisis our economic performance was very satisfactory. We had grown for about four years in a row at 9% per annum, something we had never done before. The crisis did have an impact on India. India lost 2% points in growth over a two year period because of the global slowdown, going down from 9% to 7%. The good news is that the level at which the crisis impacted us was not too serious. The lowest point we reached was much higher than what people would have thought India was capable of 10 years ago. There are some positive developments, but there is also a recognition that there are global constraints.
Fortunately the economy is recovering quite well and our projection for the year 2010/2011 is that we will see economic growth at about 8.5%. I think this is the first time in five years that the IMF are projecting we will grow faster than what we ourselves think we are going to do. The Financial Times reported the IMF as saying that India will grow at 8.8%. I am not laying claim to that. Personally I think if we grow at 8.5% it will be pretty good. Next year hopefully we can get back to the 9% that we were experiencing earlier.
India is not guaranteed to accelerate. We keep making this point at home. We have done well; we have undoubtedly been lucky, but not all of the problems that constrain our growth are over and we can happily assume it is going to carry on no matter what we do. We are very aware that we have a major task ahead of us in making sure that the policy environment is actually supportive of higher growth and put forward many of the reforms that are relevant both to improve energy efficiency and to bring about greater productivity, but the government will certainly continue down the road that it has up to now, which is to progressively open up the economy to trade and investment flows.
I want to say in this context that when we began this process of opening up, the process obviously tended to be on the industrialised countries, given their dominant position in the global economy. Given the changes that have occurred in the world, there is much greater awareness in India that the opening up and the integration has to be aimed at the region of Asia looking east - at one point we called it the Look East Policy – but actually also looking west.
The GCC is probably our largest trading partner if you take the group as a whole and is, of course, dominated by trade in energy. However, I think as a surplus generating area of the world, it is increasingly an area that we have a very substantial interest in. As a result we expect to see much greater integration in the years ahead. Certainly on our part, this is in terms of welcoming capital flows and foreign investment and also encouraging Indian companies to go out into this region. In fact, one of the most interesting things to happen in India in the last five or six years is that the process of opening up – previously perceived as welcoming inflows of foreign investment – is now perceived as a fairly symmetric process where as foreign investment comes in, Indian investment goes out. If you look at the foreign direct investment flows, there is more foreign investment going into the UK from India than the other way around. This is a reflection of the desire of Indian companies to go global - wanting to have a footprint in the major markets of the world.
Most of our major companies are now investing in Europe, the USA and China. I would hope that, given the historic ties, the fact that India is so close to this region and also the excellent political relations, we will also see an expansion of Indian investment presence in countries in the Gulf. From our point of view, I believe we have the supply side capability to proceed rapidly. The private sector has shown a great deal of dynacism and, if we can continue to provide it with an environment which is macroeconomically stable, there is no reason why we should see that growth tailing off.
As far as our external relations are concerned, it is true that export will grown much more slowly than we had hoped a few years ago which is going to be reflected in a larger current account deficit. There is an extent to which it is felt that developing countries should not depend on an export orientated strategy, but India is not in that position: it has never been that export dependent. Right now we are expecting to have a wider current account deficit, so in effect we will be contributing to the deficiencies of demand in the world a little bit. We believe that we will be able to finance that deficit because India is under invested in. If you look at the scope for foreign investment into an economy of India’s size, because we were late in the process of opening up I believe there is a great deal more scope for investment to come into India. When I talk to investors, the feedback I get is that people are interested in investing in India. Many companies have invested in China so it is logical to think they might invest in India and I think they are doing so.
Finally let me make a few relevant comments on the issue of global governance. We talked about a changing world in which the economic footprint of Asia is increasing very substantially. There are now many more players in the game than there were earlier. Do we have global institutions of governance that can actually reflect what is necessary to create a consensus among the major players? In that sense, I believe that the establishment of the G20 could be described as a logical democratisation of what had been earlier a very select club of the G7 and the G8. Of course, one of the problems is that there is a tension in the perception of governance. There is the universalist perception that global governance means that everybody must have a seat at the table, and I can see a certain moral compulsion behind that.
There is also a practical compulsion that if you really want to get decisions made – even though these smaller groups are not really the fora for negotiation – they can be very useful clubs or plurilateral groupings which enable broad consensus to be reached and can then be multilaterlised in the appropriate international fora. I believe that the G20 is the first time that we have seen a broadening of the earlier G8 to include some of the major emerging market economies. Of course, the composition of the G20 is a historical one. It is not an identification - beginning with GDP - of the x number of countries in order of size. There are many small countries in the grouping for historical reasons, and many are getting added, which is another issue. Many people said that the good thing about the G8 was that it was a small and clubby enough group. The G20 is actually more like the G26, which is a fairly large group. However, I can see that there are pressures to attempt to make it a little more representative.
I believe one would have to give it very high marks for the way the G20 performed in managing the financial crisis initially. That is to say, in the year from 2008 to 2009. They did bring about a quite significant forward movement, firstly in getting a consensus that everybody needed to have a stimulus. This was not very obvious in the sense that there were many countries in Europe that had doubts. However, I think that the consultation process did work. The succeeded in taking very significant financial steps to strengthen the international institutions and also to begin some process of governance reform in those constitutions. They also started a process of improving the structure of financial regulations and they initiated a process of consultation on macroeconomic balance. I believe that the last two issues – financial regulation and macro-economic balance – are going to be tested in the course of the next year or so. I believe that views on what should be the right kind of financial regulation differ across countries and, whereas at one stage it was thought that all these issues would be resolved in the financial stability board, the fact is that new initiatives have surfaced and been tossed around. We have to see how the initiatives - which relate to taxation on banks et cetera – are going to play out. There is not a consensus on how to handle this side of the picture.
Macro balance is, of course, a more difficult issue. I do not want to prejudge anything as I happen to be the G20 Sherpa for India and will be heading out to Calgary in two or three weeks time and I am looking forward to seeing how we address these issues. However, these are issues that we will need to address. Until about six weeks ago or so, the entire focus seemed to be on the issue of imbalances in terms of excessive export orientation on the part of some countries with really very little focus on the issue of sovereign debt. Post the Greek financial crisis it is obvious that this issue is as much of a threat to macro balance across the major countries of the world and I am not aware of exactly how this is going to be handled. However, it is certainly going to be a difficult one to handle, so I am looking forward to these discussions and the summit in Toronto. If the G20 can manage to bring about to some extent some order of consensus on these issues, it will have certainly made a contribution.
One last point on that is that we should not lose sight of the importance of bringing the Doha Round to a successful conclusion. Until very recently, open multilateral trade was almost an economics 101 type of issue. It was pretty obvious to everybody. It was virtually, universally being said that the basis of post-World War II prosperity was the steady strengthening of multilateral trading arrangements. Somehow, economics 101 is not politics 101. By that I mean that all of a sudden there were a lot of uncertainties about how the major countries were going to move in that area. To my mind, that is an important challenge before the G20. It is a little difficult to believe that the G20 can handle very complex issues like climate change if they cannot handle the much simpler – at least analytically – issues of multilateral trade. There will be two summits in the next six or eight months – one in Toronto and then later in Seoul – and it would be a major achievement if those two can produce a signal which strengthens the multilateral trade negations and possibly gives a good outcome to the Doha Round.
Those are some thoughts that I thought I would inject at this point. I am sure that the next two days of conference will go into many of these issues in great depth. I will end by thanking you very much for inviting me to kick off this discussion. Thank you.
