INDIA G-20 SUMMIT GOALS: SECURING A VOICE IN GO-SLOW REFORM

UNCLAS SECTION 01 OF 04 NEW DELHI 002909 SIPDIS SENSITIVE STATE FOR SCA/INS AND EEB/DAS NELSON STATE FOR EEB/OMA: MSAKAUE/AWHITTINGTON USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT DEPT PASS TO TREASURY/IMB: BMURDEN/WMONROE/CCARNES TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN E.O. 12958: N/A TAGS: EAGR ECON ECPS EFIN EINV ENRG EPET ETRD IN SUBJECT: INDIA G-20 SUMMIT GOALS: SECURING A VOICE IN GO-SLOW REFORM DELIBERATIONS REF A: SECSTATE 114420 REF B: NEW DELHI 02805 ¶1. (SBU) Since President Bush's invitation to participate in the G-20 Summit on November 15, India has gone into idea gathering mode - soliciting input from industrialists and think tanks, but mainly looking to a core set of government economic advisers, including summit Sherpa Montek Singh Ahluwalia (see reftel B),Ministry of Finance Chief Economic Adviser Arvind Virmani, the Prime Minister's Economic Advisory Council and the newly inducted economic adviser to the PM, former IMF economist Raghuram Rajan. PM Singh, one of only two G-20 Prime Ministers to have also been a Finance Minister, has made several public statements signaling GOI intentions for the summit. The PM has stated that there was a regulatory and supervisory failure in the developed countries. He has called for setting up special financing facilities with less conditionality, aimed at helping developing countries finance critical expenditures, especially in infrastructure. He has also remarked that the current system needs reform. Conversations with members of the PM's core team suggest, however, that expectations for the summit itself are low and that India will prefer to go slowly on implementing global architecture reforms. India appears to view the financial crisis as a moment for it to increase its voice in the global financial system. While India appears to still be defining its exact future role, importantly, it would seem to include a continued commitment to financial liberalization and integration. PRIME MINISTER CHARTS A COURSE -------------- ¶2. (SBU) Nearly all the public comments on the proper course for the G-20 Summit and India's participation have come from Prime Minister (PM) Singh. This is probably a function of the PM's superlative economic credentials, being the only G-20 PM, besides Gordon Brown, to have been a finance minister. Singh's resume also includes a stint as central bank governor, creating a rare combination of technical expertise and historical experience in addressing the current global financial crisis and India's role in it. In Beijing in late October, Singh identified three failures as the cause of the financial crisis: a regulatory and supervisory failure in developed countries; failure of risk management in private financial institutions, and failure of market disciplinary mechanisms. ¶3. (SBU) His prognosis was that coordinated global action is needed to restore confidence in credit markets and suggested that institutions like the World Bank and the IMF set up a facility with less conditionality to help finance countries that need it. The PM further refined his remarks while in Oman this past weekend, when he noted that India was working closely with other Asian countries to ensure coordinated policy action and declared that it was necessary to review the role of international financial institutions to ensure "better supervision, regulation and early warning." INCLINATION TO GO SLOW -------------- NEW DELHI 00002909 002 OF 004 ¶4. (SBU) Embassy conversations with government advisers revealed a wish to move slowly on deciding or implementing global reforms. In a meeting on November 6 with ECouns, Ministry of Finance (MoF) Chief Economic Adviser Arvind Virmani relayed some of his concerns and considerations for dealing with the global financial crisis. (Note: The GOI initially named Virmani to attend the summit as Finance Minister Chidambaram's deputy, so that Finance Secretary Ashok Chawla could stay back to monitor the domestic situation. End note.) He admitted he was concerned about the general spillover effects of financial integration, pointing to the bank events in Ireland and Iceland. He characterized the Iceland banks' situation as one where foreign banks in Iceland looked to shore up their bottom line in their home countries, adversely impacting Iceland. What, Virmani hypothesized, if something similar were to happen in an India that liberalized and allowed more foreign banks in? In such a situation, Virmani thought, it would appear that during a crisis like now, foreign banks in India would look to home country concerns and make India vulnerable. However, rather than concluding that a closed financial system was the answer, Virmani suggested that the lesson from those developments was to create consensus on global governance rules relating to foreign banks in domestic financial systems. ¶5. (SBU) Virmani was hesitant, however, about starting work to change the current global financial architecture. He thought that central bank coordination on interest rates was itself a step towards revising the global architecture whose time was not yet right. (Note: The Prime Minister told reporters in Oman on November 9 that India is coordinating policy action with other countries and Russian FM Kudrin announced at the G-20 Ministerial last weekend plans to coordinate with India, Brazil and China to boost trade and capital flows. End note). Virmani bluntly observed that it is a difficult time to defend markets when markets are not working. However, he still supports liberalization, but feels the best confidence-building measures are the steps that each government is taking individually. Although Virmani did not think the time was yet right for concrete action (specifically noting that G-20 leaders will want to factor in President-Elect Obama's views on the crisis), he thought India should be open and receptive at the Summit and wanted India to be a part of any working group that was formed. ¶6. (SBU) MoF Joint Secretary (Securities Markets) KP Krishnan, a senior and influential joint secretary at the Ministry, also seems to be advising caution on concrete action. When asked at a finance conference on November 6 about how the MOF was considering reforms in light of the crisis, Krishnan stated that the Ministry had so far been doing "fire-fighting" for the short term, and had only had the most preliminary conversations about the medium and long term implications from the crisis. In his view, he continued, there is a general tendency to draw lessons too early in the aftermath of a crisis, which leads to the wrong lessons. His inclination, Krishnan explained, was to wait until the fires were put out, before deciding what were the causes and the necessary reforms to avoid a recurrence. (Note: This go-slow orientation was also observed by Japan's Special Envoy to the G-20 Summit, Toyoo Gyoten, who told Ambassador Mulford November 11 that he perceived India would want to move slowly and take a wait-and-see approach to global change. End NEW DELHI 00002909 003 OF 004 note.) ¶7. (SBU) ICRA Chief Economist Saumitra Chaudhury, member of the Prime Minister's Economic Advisory Council, told Econoff that his input into the GOI's decision-making on the summit was not to expect anything concrete out of the Summit and to stay out of any sparring between the US and Europe. In any future discussions about new architecture, Chaudhury had suggested the creation of a new IMF lending facility for developing countries, funded by the developed economies, since they were the cause of the problem. Such a new facility should prioritize infrastructure financing, to help countries (presumably India included) facilitate further economic growth. Overall Commitment to Reforms -------------- ¶8. (SBU) For India, however, Virmani surmised that India would continue with its reforms. Not only that, Virmani thought that India should accelerate proposed reforms in light of the financial crisis. This view was echoed by Krishnan, who commented that even in the wake of current financial crisis, it was clear that India needs to continue reforms towards efficient financial intermediation to help facilitate growth. Krishnan noted that this basic need was part of a recent "vision statement" drafted by his office prior to the financial crisis, but even more needed in light of the last two months. He further observed that he did not see that a large economy like India had much choice in financial integration with the world, asserting that India had received clear gains from integration with the world economy since 1991. ¶9. (SBU) KM Abraham, a full-time member of India's Securities and Exchange Board of India (SEBI),speaking at the same conference at Krishnan on November 6, noted that D. Subbarao, the head of India's central bank, the Reserve Bank of India, had stated that greater coordination among central banks would be helpful, especially with Asian neighbors. Echoing that, Abraham stated that the crisis is helping India's regulators to collaborate with counterparts in other countries. Abraham also approvingly quoted European Central Bank President Trichet as calling for supervisory cooperation and information sharing. ¶10. (SBU) Meanwhile, the recent appointment of Raghuram Rajan, former chief economist at the IMF and professor at the University of Chicago, as economic advisor to the Prime Minister, is a major signal that Prime Minister Singh remains committed to financial sector reform in India. Rajan was the lead author of a committee report to the Government of India in April 2008 identifying key reforms and liberalization in India's financial system in order to support growth and financial inclusion. His report called for a new paradigm in the financial sector where the government leaves some critical roles to the private sector, but creates an enabling environment that contains both liberalization and effective regulation. Although the report called for a new paradigm, its title "A Hundred Small Steps" and contents recommend an incremental approach to reform, rather than a drastic overhaul. Rajan's approach may play a defining role in the global reforms that India NEW DELHI 00002909 004 OF 004 supports or promotes in the existing financial architecture. With Rajan's background at the IMF, his financial expertise, and his clear support by the PM, he is a natural choice to be India's representative in future deliberations on global architectural reform. Comment -------------- ¶11. (SBU) The Prime Minister has emerged as the defining figure in determining India's role in the G-20 Summit and what global next steps should be taken. At the same time, the voices whispering in the PM's ear seem to be advocating a go-slow approach to calls for systemic change in the global system. India has advocated for increased voting rights at the IMF and World Bank in light of its increasingly large economy, but whether it is prepared to advocate for this or any other specific changes at the Summit is not clear. A go-slow approach will allow India to listen and deliberate over suggested reforms. It may not yet know what it wants to change, but India definitely wants to be part of such a process. Reinforcing this deliberate stance is the fact that this is India's first global financial crisis; its economy and financial system were previously too closed to feel much impact. ¶12. (SBU) On specifics, the Indian delegation may argue that developing countries should not shoulder any burden of fixing the current situation, such as proposed schemes to fund new lending facilities at the IMF or World Bank. Not only is this consistent with historical Indian positions of developing versus developed countries, but the idea of India contributing money to a global fund during its current election year would probably not be supported by Congress Party President Sonia Gandhi. The IMF's suggestion that all countries should consider a stimulus package may not be supported by India unless it is exempted. It is already facing a doubling of its fiscal deficit this year, partially because of populist, expansionary spending started in March this year. It could very well argue that it is already implementing a stimulus program, through recent government pay raises, rural employment guarantee program, farm debt waiver program and an increase in income tax thresholds. MULFORD