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Collective challenges

Spillovers from Western monetary policy a problem

Business Standard Editorial Comment  |  New Delhi 

The finance ministers and central bank governors of the G-20 countries met last week to take stock of the global economic situation. Their deliberations clearly did not take place amidst any optimism about prospects. The International Monetary Fund has been painting a rather bleak picture about global growth in any case, even before the meeting. More recently, the turbulence in China, manifesting eventually in the yuan depreciating by three per cent, has clearly emerged as a major threat to global stability. These were the central focus of the discussions. However, the stance taken by the group was more in the nature of a warning against continuing down the same road. It committed to resisting the temptation to engage in "competitive devaluation". This seems to be a clear message to China to avoid further yuan depreciation in order to boost exports, which may lead to a chain reaction across emerging market currencies.

China's position before the meeting and reportedly during the deliberations is that the yuan movement was the result of the initiation of structural reforms in its financial sector and not a predatory act to boost competitiveness in the short term. Its representatives put forward the view that there is nothing amiss in the economy's fundamentals and there is, therefore, no compulsion to go down this route. The reactions of representatives from other members of the group appeared to be mixed. Some were reassured by China's plan to deal with the situation, while others felt that it was yet to be fully fleshed out. This may increase the risks of knee-jerk currency actions, which would undermine the consensus that the group has striven so hard to project. How exactly the group proposes to deal with actions that go against this stance is obviously not clear at all, but members are undoubtedly hoping that things will not come to this pass.

India's contributions to the overall discussions were substantial. Reserve Bank of India Governor Raghuram Rajan, speaking at a public event before the meetings, made a case for central banks in highly accommodative monetary stances to begin the process of raising interest rates in a calibrated fashion. This may go against the view that global instability and threats to growth do warrant an expansionary stance. However, it also addresses significant concerns about volatile capital flows being aggravated by the twin pressures of easy liquidity and emerging market turbulence. A gradual and predictable interest rate adjustment process could help to reduce the pressure from the first factor. Finance Minister Arun Jaitley's remarks indicated his scepticism about the effectiveness of short-term measures and, on this basis, he sought a more elaborate global financial safety net framework. The more general point underlying these articulations is the principle of collective responsibility within the group. While much of the focus was on China and its actions and intentions, the fact is that the monetary actions of the economies that Dr Rajan was referring to, taken in their own interests, do have negative spillovers on others. The group cannot stand together to deal with another potential threat on the basis of differentiated standards of behaviour. Individual actions that could do collective harm should be avoided and it is a collective responsibility to protect individual countries from such harm.

First Published: Sun, September 06 2015. 21:42 IST