N K Singh, Chairman of the 15th Finance Commission and president of the Institute of Economic Growth, discusses the need to revisit and review many of the important roles of the International Monetary Fund (IMF). In an interview with Sunny Verma, he says the Article IV bilateral consultations of the IMF need to be restructured and sharpened. Edited excerpts:
The IMF came out of the Bretton Woods agreement with a great purpose. But there is a view that the quota system and the lending mechanisms do not reflect contemporary relevance and economic positioning of countries like India. What is your understanding of these issues?
So, yes, the issue of restructuring, the access to the resources of the Fund, just in accordance with the changing economic configuration has been an ongoing dynamic. It’s undoubtedly true that the quotas were fixed when the economic relevance of many of the developed countries was significantly higher than the developments over the last few decades. Some tentative attempts were made to recalibrate the quotas, which enables and determines in a mechanical way, the access to the resources of the Fund. These remain, however, incomplete. Moreover, the issue is not seeking a mechanical relationship between quotas and access, and the issue is not one of legal obligations. Yes, issue is one of needs with moral obligations. So countries, which are low, middle income countries in which category India is, have low levels of access, no doubt consistent with its quota, but nowhere commensurate. India may not need balance of payments support as, fortunately, today our foreign exchange reserves due to good governance and scientific and economic growth are adequate; but (funding support) to meet other compelling needs, particularly the needs of sudden pandemic and climate finance. The issue is whether this system of a mechanical co-relationship needs a basic restructuring. This issue needs much greater consensus, it requires cooperation of all major quota holders of IMF to recognise that given India’s population and low per capita income, it would be more appropriate to reconsider not merely our obligatory access but to consider our needs as well.
The IMF’s Article IV consultations on countries also play an important role along with its financial sector assessment programme. Do these meet the specific purpose?
As you know, the Article IV consultations of the International Monetary Fund is one of the most important instruments for monitoring and surveillance of the behaviour of key economic variables in member countries. It is through this Article IV consultations that the Fund is expected to keep track of the behaviour of the economy of the member countries. There are three important infirmities. One, by hindsight, it has been repeatedly said that the Fund could never pinpoint an incipient crisis. It failed, for instance, to see the signs of the Asian currency crisis. So the question would be asked that why couldn’t they have foreseen with the high degree of technocracy which they have, the trends developing which will lead to such an important economic slowdown. So, their ability to therefore, in the Article IV consultations, both to detect, suggest and act, when incipient crisis is, has a very, very mixed analysis. Equally, the other big issue is whether the rigour of the Article IV consultations have been applied uniformly across countries. People would ask the question, that developing countries, particularly poor developing countries, many of them in Africa and Latin America, are they subjected to far more rigorous Article IV consultation process and scrutiny than, for instance, the more developed countries, and the most curious example is, that in Spain, and Greece. More importantly, when the last global financial crisis took place, people asked the question, that just because the US is the biggest shareholder of the IMF and has the biggest quota, did the IMF fail in its surveillance to support the emergence of the crisis. So the issue of symmetry, equity and uniformity, and the quality of Article IV consultations is an open issue. In fact, some years ago, they also set up an independent evaluation office in the IMF, which was headed for the first time by (Montek Singh) Ahluwalia. And it was all in the background of the fact that the failure of the Fund to spot incipient crisis and to see symmetry of action. Nonetheless, I think that the issues which I have mentioned about the uneven rigour, and the uneven capability of the IMF Article IV consultations is an important matter. By the way, Article IV consultation is the most powerful instrument in making sure that the basic objective of the IMF to see the orderly development of world growth and trade is fulfilled. And therefore, this instrument needs to be restructured, sharpened, and I think that the enormous amount of data that technology makes available today can be utilised.
What do you see as the future of these multilateral institutions?
The world certainly needs these multilateral institutions. They have rich experience and legacy and particularly developing and poor developing countries need them much more than the more developed countries or other developing countries, where development has gone up and who have sought to create alternative institutions to replace these institutions. Such exercise is embedded in avoidable geopolitics, the integrity and necessity of these institutions remain paramount for countries like India, which would like to strengthen rule-based multilateral system across the board, particularly the World Bank and the IMF. So, any infirmities need to be rectified, the institutions restored to their original intent and purpose and strengthened because the world including India is better off with these institutions than if they were to wither or sprout in other ways which may not represent the object of stability and development.