India urged to offer grants from excess forex kitty

All emerging markets, including India, should use part of their excess foreign exchange reserves for multilateral grant assistance and debt relief, through a facility managed by multilateral bodies like the World Bank and the International Monetary Fund (IMF), Lawrence H Summers, Harvard University president, said today.

If such an international facility was able to attract, even a limited fraction of excess reserves and charge even a relatively modest fee, the quantum of funds available to support concessional and grant aspects of global development would be significant, Summers said.

For example, globalizing $500 billion at a fee of 100 basis points would produce $5 billion a year that could go towards global public goods, multilateral grant assistance or debt relief, Summers said while delivering the LK Jha Memorial lecture organised by the Reserve Bank of India (RBI) here.

He said global reserves of emerging markets are far in excess of any previously enunciated criterion of reserve need for financial protection.

The so-called Guidotti-Greenspan rule that reserves should equal one year's short term debt demonstrates the spectacular increase in what might be thought of as excess reserves in emerging markets. These reserves have grown from half a trillion dollars in 1999 to over two trillion dollars today and are distributed quite broadly around the world.

Countries with excess reserves could invest in this facility, managed by the IMF and the World Bank, without assuming political responsibility for the process of investment decision and the ultimate outcome.

The net surplus of emerging Asia, led by China, exceeds the combined surplus of Europe and Japan. And given the magnitude and attractiveness of investment opportunities in emerging Asia, it would only be natural for it to encounter a current account deficit. This implies that the primary source of global demand to offset increases in United States savings should come from the Asian consumer.

India is a positive example where consumption represents close to two-thirds of the gross domestic product (GDP) and is significantly under one-half in China. There is potential for shifting to a more domestic demand-led growth strategy in emerging markets.

He also mooted the formation of a new multilateral forum which would structurally enjoy political clout over international institutions and at least have some ability to influence domestic policy decisions of individual countries.

Many frequent and intense discussions on a multilateral basis that have taken place to date will raise the prospects for a successful adjustment process and reduce risks of either a hard landing or of dangerous unilateralist responses to current account imbalances.

The forum should look at the role and governance of the existing international financial institutions in the current environment.

Clearly, the influence and governance of the major reserve accumulators need to be increased, he added.