Lagarde added that, ” In terms of vulnerabilities, I would say that we would like to see more bottlenecks being attacked by the movement of reforms which has been embraced by the government and by the Indian policy makers.”
She also hoped that the reforms that are pending before parliament, whether it is the bankruptcy code or whether it is the Goods and Services Tax (GST) will travel safely to completion.
Speaking on the issue of Chinese growth, she said that in view of the recent major announcements made in the meetings at Beijing there might be slight upward revision in the Chinese growth forecast.
Below is the verbatim transcript of the interview.
Q: The IMF is here in India and you have been here over the last four days assessing the India opportunity as well as assessing what the road ahead looks like as far as emerging markets are concerned specifically Asia. You have said that India is at a point of transformation. You are enthusiastic and opportunistic about the road ahead. We know about the fundamentals that have changed for the positive in India but if I could ask you about specific domestic vulnerabilities, what would those be?
A: I would start by being very positive about India. India is really the shining spot in a global economy that is otherwise a little bit gloomy and where growth is unfortunately too fragile and too uneven for the job creation that we would like to see and for the prosperity that we would like to see as well.
In terms of vulnerabilities, I would say that we would like to see more bottlenecks being attacked by the movement of reforms which has been embraced by the government and by the Indian policy makers.
We would like to see a continuation of the effort to strengthen the banks and at the same time restructure if necessary the corporate debt which is weighing on the banks balance sheets. We believe that very good work has already been started in that respect by the central bank of India.
I would hope that the reforms that are pending before parliament, whether it is the bankruptcy code or whether it is the Goods and Services Tax (GST) will travel safely to completion. Those would be the main recommendations that I would formulate.
I would also like to recognise the very good work which has been done in terms of fiscal positioning of India. I think that the Budget which has been presented is exactly heading in the right direction of doing a sensible consolidation from a fiscal point of view and insisting on the reforms being pursued.
Q: Let me ask you about the other big headline that has emerged from this conference and that is the review of the IMF quota. Long pending, the Indian government is finally sort of excited about the prospects of the changes that this will bring about. If I were to just look at it, this would mean that India’s share will rise to about 2.7 percent from 2.44 percent and the voting share will go up to about 2.6 percent. Also you are going to have Brazil, Russia, India, China and South Africa (BRICS) nations among the top 10 nations as far as the IMF is concerned. What will this mean specifically for the road ahead as far as the IMF is concerned? In terms of policy priorities what will it mean for emerging markets like India?
A: The IMF is one of the very few international institutions whose voting power, share in the governance evolved over time. It is only fitting that the reform has now put all five emerging market economies in the top 10 list of my shareholders. India is now part of that top 10 group which is good and a clear recognition of the leading role played by India, not only in the region but in the world.
It is a continuum, we never stopped looking at evolution. We have never stopped looking at potential reform of the institution. We have just completed a reform that had been decided in 2010. We worked really hard on that and finally thanks to the long awaited ratification by the US Congress now the reform of the IMF which includes those emerging market economies, particularly India and the top 10 is finally falling into place and we have a new phase of the IMF.
What it means in real life is that those countries have more to say. They are at the table with a more solid voice and more share in the quota of the institution. So, it is an ongoing process, it is going to continue because we have to look at the quota system, we have to look at the volume of quota on a regular basis and the date has been set to October 2017 for us to make proposals to the board and for the next reform to be looked at.
Q: Since we are talking about reforms within the IMF and this begs the question, which has probably been asked a few several times over. Can we expect the non-European to actually head the IMF. You are the 11th European in charge of the IMF. Is that in the realm of possibilities in the near future?
A: I took huge comfort that all emerging market economies and all low income countries actually supported my candidacy for second term and I am very grateful for that. I am very grateful for India’s support. I think it is testimony to the fact that all along in the last five years I have tried to be totally even handed and to pay as much attention to the emerging market economies as we did to the advanced economies as we did to the low income countries, everything being equal.
Will there be somebody else after me? I certainly hope so. Will it be somebody competent? I certainly hope so. Will it be somebody from another part of the world? Very possible.
Q: Let me talk to you then about the emerging market challenges that we are facing today. Raghuram Rajan the governor of Reserve Bank of India (RBI) at the Advancing Asia Conference alluded to a couple of things that he believes need to be looked at. He has talked about the need for coordinated response by central banks and an integrated system which he believes needs to start being put in place at this point in time. He has also talked about the negative spill over impact of accommodative monetary policy in developing countries and how that impacts countries like India. Where do you stand on this integrated approach, coordinated central bank action and do you believe that we could expect this as being a reality anytime soon? He has also alluded to the fact that perhaps organisations like the IMF could play a lead role in getting this coordinated approach together?
A: We have all along identified spill over effects spill backs, how one decision made in one particular corner can actually affect other economies around the world and we are studying them from a financial point of view, from a trade point of view and we will continue doing that.
As a centre of expertise and analytical work of those particular issues we stand as a good, reliable and independent forum for whoever wants to actually work on better coordination.
We also believe that better coordination is actually needed. The world is vastly interconnected. People trade with each other, finance each other, and there has to be coordination in response to those interconnections. We have seen that in action. Whenever say the Fed for instance decides in a particular case to propose to increase the rate, markets move around the world.
Luckily the latest interest rate raise was well announced, well communicated, well anticipated and emerging market economies were much better prepared this time than they were on the occasion of the taper tantrum as it was called at that time.
So, yes we can indeed be that forum. We do play that role in a discrete fashion not necessarily in public and very vocally. However it is something that is needed.
Q: Since you talked about the Fed, let me ask you about what you expect the Fed to now do, whether you expect a gradual move out of the accommodative policy and what that will mean then finally as far as emerging markets like India is concerned? Do you believe that we could see an even slower, more gradual lift off as far as the Fed is concerned?
A: It is difficult to predict for one reason because the Fed has announced very clearly that it would look at the overall economic situation on the basis of two key parameters that it uses – the inflation rate and the unemployment / employment situation in the United States (US) domestic market.
Janet Yellen has also signalled on a couple of occasions that they would be very mindful of the international situation and what we call the spill back effect of what is happening in the emerging market economies and in the low income countries back in the US before any decision is made to either raise, wait, raise gradually and that in any event all of that would be communicated.
So, we should know that we are relying on data and on the evolution of the situation where the international world has a bearing on the US domestic economy as well.
Q: Yesterday in his speech the governor said that central bankers flirt with ever more unconventional policies, it is worth asking if these policies really move the economy towards the desired objective. This is the argument that is being debated. We have seen Mario Draghi act as part of the European Central Bank (ECB) just a couple of days ago. The IMF in its latest outlook has also said that developed countries need to continue with accommodative monetary policies because the inflation rate is much below the targeted central bank level. Do you believe that we are perhaps now reaching a point where these unconventional policies are not having the desired impact?
A: We are saying very clearly that what is needed is a use of all the tools in the toolbox. We are saying that monetary policy while necessary should not be the only game in town. It should not be over burdened and that it should be rescued by combination of fiscal measures wherever there is fiscal space as well as structural reforms well targeted, well tailored to each country specific situation. So, that is clearly our position.
Q: You don’t believe that perhaps the levers at this point in time that central bankers could exercise are few and far between?
A: I think that is a controversial debate to be had. However what is more important is the counterfactual, where would we be if the monetary policy that is adopted now had not been adopted? I think we would be in a pretty poor place when it comes to inflation in particular.
Q: Let me ask you about global growth and the risks that you have outlined as part of the IMFs global growth forecast. The rebalancing in China is one of the key risks. On the basis of what you are hearing from China, on the basis of the data that we now have, do you believe that we could see a further downside revision as far as the growth forecast for China is concerned? 6.3 percent in 2016, 6 percent in 2017 is the IMFs growth outlook for China. What is the indication that you are getting from China at this point in time? Do you expect more pain?
A: If we were doing anything about this forecast, it is probably going to slightly upgrade them a little bit because major announcements have been made during the recent meetings that took place in Beijing in the last 10 days. Some of them indicating clearly fiscal support in order to sustain growth going forward – significant reforms and restructurings. So, that has to be taken into account in our forecast because clearly it was not on the cards, it was not on the table. If anything it might be an upward revision.
The work is being done as we speak and we need to really identify what will move the needle from the various announcements that have been made by the Premier Li.
Q: What do you believe have been the most significant changes that the Chinese government has undertaken which would lead you to then revise upwards the growth forecast and the growth outlook for China?
A: Some fiscal stimulus has been announced and that has a bearing on growth.
Q: Let me ask you about one of the other challenges that we could potentially be faced with and that is the currency volatility. In India the rupee has weakened about 6 percent against the dollar but it has remained largely flat in 2015 on a trade weighted basis. How significant a risk is currency volatility, the possibility of adjustments or devaluation of currencies specially the Chinese currency?
A: The transition is under way in China both from a growth model point of view but also from a monetary policy point of view, from a currency point of view as well. There is a move towards a more market driven principle, there is a reference that is now made clearly to basket of currencies rather than a strict or almost strict peg to the dollar. This is going to have an impact and will lead to inevitable either appreciation or depreciation depending on how the situation evolves over time.
However that is something that is desirable and that is to be expected at a reasonable and sensible pace.
Q: You don’t believe that we are going to be faced with any sort of currency shocks or at least that is not your expectation or your assessment at this point in time?
A: Currency will vary and there will be volatility. There is no question about that but I don’t think it is going to be driven by the Chinese monetary and currency policy going forward.
Q: In the context of India and the work that is being done what do you believe ought to be the move as far as policy prescription is concerned whether it is on the part of the government or it is on the part of corporations, what is it that you would like to see to ensure better representation of women in the workforce, drive down attrition of women specially when it comes to the mid-level, what is it that you would like to see?
A: I would first observe that the participation of Indian women in the Indian workforce is low relative to average in equivalent countries. Women are underrepresented. They are often under paid relative to others. They constitute a large number of the unreported and unofficial labour. So, there is a great discrepancy that needs to be addressed.
Policies abound that can be used, whether it is better child care centres, whether it is the tax rules in place, whether it is the maternity leaves available, we had a very good session during the conference at which representatives of other countries including the likes of Bangladesh or Sri Lanka have exposed what their policies are that are actually helping and pushing women to join the workplace if they so wish.
I think there is a cultural bias as well which does not really operate in favour of women in Indian society. I hope that this is addressed by men and women alike and taken up at the highest level in government as well.
Q: If you had the choice of a super power what would you ask for?
A: I think it is the ultimate luxury to have more time, that is true and something that we cannot change. So, it is the ultimate dream.
Q: I remember reading an interview of yours where you said that your term at the IMF has been somewhat like a rollercoaster. As you now start your second term at the IMF, what would the priorities be for you? You have often said that you want the organisation to be much more agile. What would be the priorities as far as you are concerned for the IMF in your second term?
A: I have used AIM which includes agile, integrated and member focused. Agile I think speaks for itself, it sets the ability of the institution to even better respond to the change of economic situations.
Integrated means that we have to all work together as collectively as we can. We have to help coordinate when others are prepared to coordinate. We have to work with other institutions as well.
Member focused means that I want to listen to the voices of India, to the voices of Indonesia, to the voices of the Maldives and any places around because each country has its specific sets of economic problems, cultural issues and social attitudes which all have to be taken into account in order to help with solutions.
Q: Let me end by asking you, if you could prioritise the risks at this point in time that the global economy is faced with, what would those key risks be?
A: I think the ultimate long term risk that we should all face critically is climate change.
Q: What about debt because the debt overhang seems to be holding back growth which is forcing the IMF and others to then downgrade your own growth forecast?
A: I think it is very good that countries like India for instance are actually including bankruptcy law, mediation systems and out of court settlements mechanism in order to address the corporate debt.
Sovereign debt is an issue that needs to be addressed by governments and I think it is a combination of all tools together in order to generate growth that will be sustainable growth and climate friendly growth that will actually respond properly to the issue of debt.
Q: The Finance Minister while introducing or speaking at the inaugural here at the Advancing Asia said that he believes or he was reasonably confident that both in your personal and professional capacity you are a good friend of India. What is the India experience specially over the last four years been for you and the four days that you have spent here in India been for you?
A: My Indian experience goes way back before the last four years. What I have always enjoyed in this country is the vibrance, the enthusiasm, the creativity, the colours, the warmth, the hospitality, the generosity and the wit.
Q: And the Indian wardrobe that you have acquired as well?
A: Absolutely. It epitomises that beautifully and here you are creativity, colours.
(Interview transcribed by Swapnil Deshpande)