September 28, 2011

BRINGING THE WORLD HOME: India’s finance ministry is gaining international prominence

- India’s finance ministry is gaining international prominence
K.P. Nayar

A new dimension
Once a foreign minister, always a foreign minister is one of the enduring adages in the world of diplomacy. Pranab Mukherjee proved it once again last week during his just-concluded visit to Washington.

At global meetings of multilateral financial institutions, Mukherjee has emerged as one of the most sought after attendees not only by sheer dint of his long experience, but also on account of his institutional memory that now spans just two years short of four full decades since he first became a Union minister.

It was by virtue of this long experience and institutional memory that Mukherjee was elected chair of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development, commonly known as G-24, in Washington last week. Mukherjee is the only finance minister to be elected chair of G-24 twice in its 40-year history, the second time after a long gap of 27 years. The first occasion when he chaired the group was in 1984. Then too, he was India’s finance minister in Indira Gandhi’s government. The G-24 was originally created to coordinate the position of developing countries on monetary and development issues, particularly the agenda on the reform of the international monetary system, an issue which has now acquired renewed urgency.

The other reason why Mukherjee was sought after at the annual meetings of the World Bank Group in Washington last week was, of course, the India story. That story is best exemplified by an exchange between Mukherjee and the British secretary of state for international development, Andrew Mitchell, on the sidelines of the World Bank-International Monetary Fund parleys.

The Indian finance minister was lamenting that India’s growth rate had fallen to around seven per cent, a remark that left Mitchell roundly aghast and somewhat envious. “You are displeased that your growth rate is only seven per cent?” the British minister asked Mukherjee. “I wish my country could score half that figure,” Mitchell wistfully said, reflecting Europe’s plight in the current global economic scenario. Countries like the United Kingdom and the United States of America are looking up to India and its current growth rate for a refreshing change.

At meeting after meeting in Washington last week, developed countries bent over backwards to assure Mukherjee and his counterparts from Brazil, Russia, China and South Africa that they were serious about commitments made at Group of Twenty summits about steps to restore their fiscal health. India’s finance minister would have been remiss if he had not plainly told a meeting of the International Monetary and Financial Committee as he did on Saturday that “for advanced economies, the problem of solvency is right at the heart of the efforts to formulate an appropriate fiscal policy and sustainability of public debt”. All this would have been unthinkable until the financial meltdown of 2008. At the same time, Mukherjee made it clear that emerging economies like India had done more than their fair share to help in coping with that meltdown.

“Developing countries withstood the earlier crisis in a commendable way and showed considerable resilience. We responded through policies which were helped by the strong economic position we were in prior to the crisis — higher reserves, better fiscal positions and better external balances. Therefore, we could preserve core spending on development while responding to crisis needs. It was not that the crisis did not affect the poor. The [World] Bank’s own estimates suggest that an additional 64 million people were pushed into poverty by the crisis. We took steps to shelter the poor from the crisis,” Mukherjee told the development committee, also on Saturday.

Fresh from extensive consultations in Washington, he will seek to give a new dimension to the benefits spinning off from India’s growth rate that is impressive for any country in the current global economic climate. But in doing so, he will draw on his experience twice as India’s external affairs minister. Mukherjee has an equation with the new managing director of the IMF, Christine Lagarde, which goes beyond that between two finance ministers, one of whom has now become an international civil servant.

His relations with the World Bank president, Robert Zoellick, were cemented during the period when Zoellick was the deputy secretary of state in the George W. Bush administration. That was a very critical time in the formative months of the Indo-US nuclear deal and Mukherjee had just moved from the defence ministry to start his second tenure as external affairs minister.

The first step in this new direction is to be called “Finance Plus”, which will be the Pranab Mukherjee-led finance ministry’s new criteria for selection of projects to be proposed for assistance from the World Bank, the Asian Development Bank and the International Fund for Agricultural Development.

Recognizing that the nature of India’s borrowings from multilateral development banks is changing in view of the country’s growth, there will be a cap of $500 million in external assistance for any project inclusive of technical assistance. The overall portfolio of borrowing from multilateral financial institutions will also be reoriented among states that are lagging behind in development and need help under special categories.

With his experience of two tenures as external affairs minister, Mukherjee is now doing to the finance ministry what he did earlier during his stint as defence minister. During the time that he was defence minister, Mukherjee internationalized the defence ministry: he created a new formal framework for defence relations with the US, unveiled new vistas of bilateral defence ties with Japan and explored bilateral defence confidence building in Beijing.

In the finance ministry, there has always been a post reserved for a diplomat, an Indian Foreign Service officer whose overseas exposure could be tapped in the pursuit of external relations. But until recently, such borrowed expertise from the IFS has been under-utilized and used merely to deal with difficult bilateral relationships with foreign countries that the finance ministry could not handle on its own.

But under Mukherjee’s stewardship as finance minister, the incumbent IFS officer, Venu Rajamony, who has been consul-general in Dubai, embassy spokesperson in Washington and an acknowledged expert on China, has been tasked with the job of recasting his ministry’s relations with the outside world in its totality. The first major international event as part of such change will take place in New Delhi next month when an Eminent Persons’ Forum on 25 years of the Asian Development Bank’s partnership with India in the context of Asia’s future will convene in New Delhi. Thereafter, in 2013, India will host the 46th annual meeting of the ADB in May 2013.

The finance ministry’s long-term goal in doing these is to refashion India as a “model” borrower from multilateral financial institutions. This will be done taking into account that although India is now a trillion-dollar economy, its total borrowing from international institutions is merely around $32 billion.

The bulk of the fiscal flows into the country is now from the private sector. Besides, money is no longer an issue, a sea change from the years when New Delhi would accept any money that came its way by way of development assistance. Indeed, an IFS officer’s mandate in the finance ministry earlier was to somehow secure those aid flows. But now with a streamlining of procedures, the quality of money, that is the worth of the projects for which funding is coming in is being reoriented.

As a result, under Mukherjee’s “Finance Plus” criteria, both Central ministries and state governments are being instructed to send for purposes of soliciting international assistance only project proposals which have the revised elements. Proposals which have transformational impact on society and are innovative in leveraging funds will get priority support. It is a worthwhile change in approach with an external affairs twist that is well worth pursuing as the finance ministry embraces the outside world.

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