The Toronto Summit deliberated on 26-27 June and concluded, issuing a communiqu that papered over sharp differences among the Group of 20 nations on vital policy issues, committed itself to continue developing coordination on regulation and macro-economic policy among the major economies, and set a deadline of early November for International Monetary Fund (IMF) members to complete ratifying the changes in its capital structure to grant developing countries greater voting powers and enhance the Fund's lending capacity.
Not that there was any specific decision, but, failing to find any solution or any set of solutions, the Group allowed each member to adopt its own differentiated and tailored policies on a range of topics, which were high on the Forum's agenda in its bid to re-balance global growth. This has enabled each Member to individually take a call, almost on all issues from stabilizing debt burdens of governments to make banks more resilient.
However, there were sharp differences on two issues within the Group i.e. the pace at which countries would exit stimulus and taxing banks to generate resources for the future bailout. Thus on all matters that were on the table, the Summit avoided making any mandatory prescriptions, leaving member-countries to follow their own counsel, while observing some principles of prudence. It was, however, agreed that Members would deliver on their existing stimulus plans, and halve fiscal deficit by 2013 or stabilize or reduce their debt-GDP ration by 2016. They further agreed that they would communicate their deficit reduction plans now to reassure debt markets that have, of late, caused anxious moments over possible sovereign default in the Euro zone.
However, the Toronto Summit clearly voted for growth for the short term, over austerity. Having failed to reconcile their differences, the leaders deferred decisions on most crucial issues to the Seoul Summit in November. Further, the International Monetary Fund (IMF)'s ongoing assessment of the financial imperatives of the G-20 countries would provide more clarity on how far each of them is wiling to subordinate their national sovereignty to the needs of managing an increasingly inter-dependent world. IMF has indeed put forth some categories of countries, which, because of their structural similarities, could take similar approaches in tackling macro-economic problems, but it is, however, too early to predict the outcome of the process.
Interacting with the media at Air Force One, the PM's special aircraft, Prime Minister ManMohan Singh, riding on the confidence boost that he received by having outperformed everybody else by withdrawing fuel subsidies at home, even before the mandate was given by G-20 meet and as a leader of one of the fastest growing economies in the word, was quite articulate on what has been made out as achievement of G-20 and its general direction now onwards. He said the Toronto meeting was in some ways the preparation for Seoul meeting in November this year. I think the (Toronto) Summit has helped in charting out the agenda and action points for the Seoul Summit. He added that immediate concern of G-20 was the situation in the Euro zone, especially the condition of some of the European banks' balance sheets. He said there was an agreement among the leaders that global economic recovery over the last year was rather fragile.
On the question whether there was any major headway in the Toronto Summit when it comes to re-balancing and strengthening the global growth, he said, What is needed is calibrated attempt at fiscal consolidation, rather than a one-size-fits-all sort of action. In that way, there was progress. He said growth is the immediate need. Even those countries which want to go ahead with fiscal consolidation reckon that they must do it in a growth-friendly manner. Even those European countries which came out with targets for fiscal consolidation were proceeding with due caution. He said, So, the Summit had played a useful role in clarifying that the scope of fiscal consolidation should be found.
India Outperforms by Withdrawing Fuel Subsidies even before G-20 Mandate
However, while decisions by G-20 do not impose any obligations on any country, yet an affirmation in the Toronto Summit declaration that the Group would encourage continued and full implementation of country-specific strategies to phase out inefficient fossil fuel subsidies in the medium term is perhaps the only G-20 mandate on India's policy makers. This was followed by India not only in principle but in practice too, which is why that India, on its own volition withdrew subsidies across the board on fossil fuels, even if probably the timing of withdrawal of subsidies was not at all opportune. I personally see no other reason as to why and where was the urgency, in fact, haste, in abrupt announcement of withdrawal of subsidy on all petroleum products, including kerosene, which has directly hit the poorest section of Indian society, politically called, AAM AADMI. This was especially painful for everybody when the inflation, specially food inflation was at high two-digit level. Politically, it may have earned India a few brownie points at international gathering, but it did successfully provoke the entire opposition within the country to register their loudest protest, credited and believed to be the biggest ever since the political movement started by Jai Prakash Narain, which challenged the might of Indira Gandhi, forcing her out of office.
India's fiscal deficit
India plans to halve its fiscal deficit by 2013-14 and is well on its course to achieve that target, thanks to it high GDP growth. While briefing media persons on his return journey from Toronto, Prime Minister Man Mohan Singh said, As far as India is concerned, our banking system remains well-managed and our economy is growing at a rate of 8.5% per annum. Our fiscal position is a cause for concern, but when we compare our fiscal deficit or debt-to-GDP ratio with those of major developed countries, I think we have come out much better.
But my point is that even better may not be as good as good. To my mind, the Indian economy is emitting mixed signals, notwithstanding the statistical cloak it might don. All our projections of growth are based on a weak base during 2009-10 which was forced on India due to global economic downturn. It is very much like the Government announcing that there has been a decline in inflation, including food inflation, whereas the fact of the matter is that the prices of all food articles are galloping. Even the last year's performance is still not final and the projection for the current year is even more hypothetical and tentative. The way inflation is being promoted by the present Government by increasing the costs of inputs both for industry and consumption, there would be visible impact on inflation, as per the analysis and opinion of our Finance Secretary.
True, the Government might succeed in reducing drain of public expenditure on subsidy, but this could be countered by the general inflation, particularly food inflation, which would ultimately reflect in increased cost of production with its own implications on domestic consumption and inflation; and of course, exports. The Government might have hit a jackpot by way of unimagined level of revenue from 3-G spectrum, but the inevitable and imminent escalation of inflation will undo what has been an unexpected bounty.
India's trade deficit stood at $117.3 billion in 2009-10 down from $118.7 billion in 2008-09. This should have cheered Government of India. But the sad part of the story is that a survey in April forecast suggests that the gap would widen to $132.70 billion in 2010-11 which would further enlarge to $ 154.50 billion in 2011-12. This view is based on the premises that with the rebound in the economy, the demand for manufacturing and oil imports would go up, while the Euro zone debt crisis would hit exports. A wider deficit would pressure the partially convertible Rupees, which has lost more than 5% from its 2010 peak of 44.18 to the US dollar. A recent survey says that every increase of $1 per barrel in Indian crude basket prices pushes up the annual import bill by $1.2 billion dollars.
Impact on Indian Exports
A recent survey acknowledges that the EU accounts for a fifth of India's exports and if the crisis there is prolonged or takes a turn for the worse, it could widen the trade deficit by hurting demand from the 27-nation bloc. We must take into account the looming uncertainly that has not let world economy go out of its grip and this is not confined only Europe, but also US, which together account for more than 66% of Indian textile and garment exports. These are very important export destinations and can and will certainly strongly influence the export scenario for any country, including India. Says Rupa Tege Nisure, Chief Economist at Bank of Baroda, "Exports look better than last year, but they will receive some setback because of Euro zone. There would not be a huge contagion, but global demand will weaken for our exports." Adds Ashish Vaidya, Head of Trading for Fixed Income Currencies and Commodities at UBS, Mumbai, It would depend on whether the risk aversion theme is back or not. I am of the view the Euro zone is in serious stress and the world is not as settled place as it was before 2008. All these are bound to impact India's export trade, including textile and garment exports.
The sermonisation in cool comfort of Air Force One might elate both the Prime Minister and the media on board, but the harsh and hot realities of Delhi now and later would be a real test of the assessment and projection made by our esteemed Prime Minister.