After showing resilience during the global economic downturn, India and Australia should seek flexible outcome from the G20 meetings, says Ian Harper, a leading Australian economist. A member of the Wallis regulatory framework, which transformed Australia’s financial regulation, Harper tells Devika Banerji that India, equipped with lessons from the crisis, is ideally poised to develop its financial market. Excerpts:
How is the global economy faring right now?
I think we are recovering slowly from the worst of the economic crisis. It will be a long and slow recovery, though. There is enough stimulus into the system internationally. We are unlikely to have a second major stage of the crisis. We may see some secondary shocks, but I think we will not see another major downturn from this particular crisis that will destabilise growth.
Has the global securities market hit a roadblock as the trend has reversed towards traditional banking systems?
I think what we have seen is a classic overreach. We rushed out thinking securitisation was a new system of growth, based on technological revolution. It turns out that much of the growth was an excrescence. It resulted because of lack of regulation. A lot of institutions, which were banks or bank-like, snuck out of reach. So, there is a rejigging taking place and, thus, there is a correction. You have not seen the end of securitisation, and after the correction, we will go through a period of consolidation.
How do you see Indian markets after the crisis?
India is in a very fortunate position because its markets are yet to develop significantly. India has a ring side seat after witnessing what could happen when markets act up. Being a bank-dominated market and having gone through the crisis, you are in a position to ensure that the type of regulations that are in place for your markets can pre-insure the type of crisis that the western world has experienced. I think the future for India in that respect is very good as it will get markets anyway as they come but may now have seen how badly they can serve you if they are not properly regulated.
You said India and Australia had similar concerns regarding the financial regulatory framework that should be followed by the G20 nations.
Yes. Here are two countries at very different stages of development with very different financial systems. But in both cases, they came through the financial crisis immune to the worst that it could toss up. In both cases, the regulatory system is quite independent of the political process and has sufficient weight to stand against pressures that can be brought by banks and other financial institutions. Though it might be surprising in case of India, but it is so. Lesson number one is that you need regulators who are fearless and a political process that relies on them and backs them.
Secondly, whatever G20 meetings come up with, we would not want them to adversely affect India or Australia’s financial development because neither of us suffered from these things. You have a system which is more bank-dominated and one which is more cautiously regulated. We have a system that is openly regulated. With the GFC coming in the middle, you might have an easier system while we could have a tougher system. But an easier system for you too quickly might be a problem. So, for India, it’s too early to have an easier system, while for Australia it will be too restrictive a system. Therefore, we do need international coordination but we also need norms to take into consideration the circumstances of each party.
So, even as imposition of a G20 system will have different costs for India and Australia, both can join hands in saying ‘please be flexible’.
India is currently seen as a rapidly growing economy despite the crisis and analysts foresee a rosy path. Are there hurdles that might derail the growth story?
Much of your growth is domestic. In the absence of any major political fallout, India is developing along the classical path and its growth is fulfiling for the population as everybody is getting wealthier. What can derail the growth story is a major political disability due to tensions with neighbouring countries. Domestic or ethnic conflict is usually associated with things going bad but when things are going well, people are expected to live with their neighbours more easily. India is less exposed to the rest of the world. But as it develops, the exposure will increase, and with effective policies it should bring stability and further consolidation to your economy.