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G20 meet sees agreement on common accounting standards: FM

Published on Mon, Nov 17, 2008 at 08:32 | Source : CNBC-TV18

Updated at Mon, Nov 17, 2008 at 17:41

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The G-20 meet turned out to be a damp squib as the group of 20 nations delayed agreeing on specific measures to combat global crisis. The meet laid out regulatory proposals to prevent a recurrence of the financial crisis. Further, the group urged for a 'broader policy response' citing the potential for additional interest-rate cuts and fiscal stimulus. The group has also set a March deadline for recommendations on strengthening accounting standards, derivatives markets and oversight of hedge funds and debt-rating companies. The next meet is expected in April, 2009.

Speaking in an exclusively interview with CNBC TV18, Finance Minister P Chidambaram, who attended the G-20 Meet in Washington, said that he expects some slowdown in all sectors and added that the impact of global crisis in India would last for six-nine months. He said that exports, capital flows and exchange rates would get affected but added that the global crisis would not have a direct impact on India.

Chidambaram said the meet had adopted a detailed and ambitious action plan. There was a broad agreement [at the G-20] on common accounting standards among countries, Chidambaram added, terming it as a coordinated effort to work on financial stability. He also felt that more governance reforms are needed in the IMF, or International Monetary Fund, and expects more representation for developing countries.

Also Read: G20: Meet could discuss coordination, unified policy action

The Finance Minister also added that developing countries were still under represented. He said that protectionism was not the answer to the current crisis and believes that free flow of goods, services and capital was the key to solve the current crisis.

Here is a verbatim transcript of the exclusive interview with P Chidambaram on CNBC-TV18. Also watch the accompanying video.

Q: How would you describe the outcome of what some have called a historic financial summit?

A: It was a very detailed declaration and an even more detailed action plan. The members have given us four months to take measures and report back. The next meeting is in April. We will have to get back to see how many countries actually implement the action plan, it is an ambitious action plan.

Q: There is talk of global coordination mechanism to deal with first the crisis in the short-term and then to formulate long-term financial goals what are the specifics of such an arrangement?

A: At the moment they have asked the Troika of G-20 to coordinate that is Brazil, UK and another country to coordinate. They promised to expand the financial stability forum and the Bank for International Settlements (BIS) and also work on more governance reforms on the International Monetary Fund (IMF). We are keen to see that the Financial Stability Forum (FSF) is expanded, the BIS is expanded and we will work on these forums.

Q: Right before this Summit, you said that, "India should get more inclusivity in international financial institutions like the IMF." What exactly did you put on the table during the Summit? Will restructuring like Bretton Woods possibly expand India's mandate in the future and in institutions like this?

A: I don't think there is going to be another Bretton Woods Institution. They will give greater representation and voice to developing countries. We pressed this point since the Singapore meeting of the IMF. We have had marginal success in some quarters and voting rights were indeed revised early this year. India's share increased by very small amount but we still think that the developing countries are under represented. Therefore they should have more representation and more voice, which means some other countries, would have to take a haircut. Now whether they will be ready through that I can't say, they have set the ball rolling now and it would be difficult now to resist any governance reforms on the IMF.

Q: You also warned against 'protectionist tendencies by the West' right before the Summit. Do you think this is going to be a hard sell to the Western countries, given the fact that even in our economy, everybody is hurting financially right now?

A: No, the declaration clearly says that we must issue any protectionist measures and all 20 countries have signed up, so I suppose no one will be allowed to take protectionist measures. Protectionism is not the answer to the current crisis, in fact free flow of goods and services and free flow of capital is the answer. For a developing country like India, this is a better course to take. So we hope that the developed countries will not adopt protectionist measures.

Q: During the G-20 meet in Brazil there was some talk about adopting a global accounting architecture. Now isn't that already happening given the fact that there is increase in conversion with the International Financial Reporting Standards (IFRS), which will kick off in India in the next couple of years?

A: No, there are two standards now; one is standards to which India has agreed to abide by. The other is standards, which the US and some other countries are following. So what we have agreed now is a convergence of standards and common accounting standards. So, presumably these two standards will get together to work out common standards or try to converge their standards. It is better than following two entirely different standards. So I think there is broad agreement on common accounting standards. This was a point which we pressed in Sao Paulo and we got included in to communicate and I am happy that point is been upheld by the leaders.

Q: What role do free trade philosophies like the World Trade Organization (WTO) play in mitigating the financial crisis of the magnitude that we are experiencing right now?

A: Free trade is a powerful counter cyclical measure when there is an economic downturn. Therefore, the declaration affirms free trade. They said they would strive towards a successful conclusion of the Doha Round and added they would desist from taking any new protectionist measures. The officials are meeting the ministers and are expected to meet between December 10 and December 14. So, if trade ministers can sign off on agriculture and non-agricultural market access (NAMA) that will be a major step forward but I can't speak for what is going to happen in December.

Q: Did the Summit also call for a correction of China's fixed currency?

A: No that didn't arise at all.

Q: What do you think is the effectiveness of a Summit like this which is hosted by a lame duck President?

A: He is lame duck but that does not mean he is not President. The fact that every invitee turned up at the head of state or head of government level is evidence that they took it seriously. They did not send a deputy or a minister, the head of government or the head of state turned up.

I think President Bush conducted himself with great dignity, spoke little, allowed everyone to speak as long as he or she wanted and the declaration itself is a result of hard work by the deputies.

But I do not think you should look upon this exercise as a one off exercise. This exercise lays out a timeline which takes the effort beyond January 20, 2009. Therefore the succeeding administration will also be involved in this exercise. In his closing remarks, President Bush said that he had kept Mr Obama, President Elect (US), fully briefed on the run up to the Summit and he would brief him again after the Summit and he expects that the new administration would commit itself to the action plan and the timelines as much as his own administration has.

Q: You have repeatedly maintained that the fundamentals of the Indian economy are just fine but we have seen exports decline for the first time in five years, tax collections are also slipping and production figures seem to be slowing down; do you want to reassess that view?

A: If world output is slowing down, if world demand is slowing down, it will have an impact on our economy. Our growth rate would slowdown as well. We will not be directly affected but there will be an indirect impact on exports, on capital flows, on the exchange rate. That is what we are experiencing but that does not mean that the fundamentals are not strong.

When we say fundamentals are strong what we mean is, a company like Tata Steel is basically a strong steel producer, a company like Infosys or Wipro are basically very strong players in the software market.

Our agriculture is still very strong and we can produce enough food grains to feed 1.1 billion people. They are not affected by what is happening with the rest of the world.

Yes, the bottomline in a profit and loss (P&L) statement of a company will indeed be affected but that does not mean something dramatic has happened in the Indian economy that you say that the Indian economy has weakened.

There will be some slowdown in every sector - exports, production, sales but with monetary measures, fiscal stimulus, counter cyclical measures and enlightened measures by the companies themselves, we can get over this painful period of adjustment in about six months or nine months and we should get back to the growth rate.

Europe, America and country after country is now reporting an official recession; that means two successive quarters have negative growth or contraction in the GDP (gross domestic product). We are nowhere near that.

The Prime Minister (PM) share a similar view as I.

Q: PM, Manmohan Singh during the Summit statement said that he is forecasting between 7-7.5%, you said 8 %, do you want to revise that now?

A: We are not revising it upward or downward. That is not a serious question. There are estimates between 7% and 8% and it could be anywhere between 7% and 8%. If you ask any finance minister (FM) who is in Washington today, ask him about India's growth rate, he will respond to you with a tinge of envy that India will still record a growth rate between 7% and 8% this year. The only other large country, which is growing at a faster rate will be China.

Q: The PM is expected to canvas greater investment in capital flows, are there any more policy changes which could enable you to sell India story even more to foreign western investors?

A: India's policy stance has attracted substantial quantities of foreign direct investment in the last four years as well as foreign institutional investment.

We have not revised our policy to put off any investor. The investor's position is deteriorated. I think our policy stance is quite attractive to a foreign investor and the margin of course can always make improvements.

I think the department of industrial production is coming forward with the paper to make some improvements in the margin. India remains an attractive destination for the foreign investor.

Q: The IMF (International Monetary Fund) today released a statement; they have agreed, at the staff agreement level as they call it, a loan to Pakistan for about USD 7.6 billion. What are your thoughts about that? Is India looking for something similar from world bodies?

A: No, we do not need an IMF programme. We are sorry that Pakistan's economy has slipped and Pakistan requires an IMF programme. We have signalled a support for IMF assistance to Pakistan. We hope Pakistan will quickly recover. We are not at all anyway near an IMF programme.

Q: But you have said that developed economies and world institutions need to shield India's economy from any negative effects from this crisis and you have asked for more loans for example from the World Bank?

A: That is different from the IMF. That is Development Assistance that is not an IMF programme. I think the distinction must be kept in mind always.

We are among the best borrowers from the World Bank. Our states are very happy to borrow from World Bank and to implement their projects.

Infact, we have a number of projects that have been pushed back to 2009-2010 and 2010-2011 as we are unable to accommodate it in 2008-2009.

Now that the World Bank has come forward to lend more and we are willing to borrow more, I have had a talk with Mr Robert Zoellick of the World Bank, we are now asking the World Bank to lend us more, which means projects now slated for 2009-2010 and 2010-2011 can be brought forward. We will try to accommodate as many of them as possible in 2008-2009 itself.

Q: Inflation is now down to single figure, should we expect a repo rate cut and a CRR rate cut from the RBI (Reserve Bank of India)?

A: I do not think one should get too excited about single-digit inflation. The single-digit inflation is still close to 9% and that is beyond the tolerance limit.

We would like inflation to come down even more sharply. We hope that will happen in the next few weeks. So I think we are jumping the gun when we are talking about rate cuts.

Besides, rate cut is not a question that I can answer; rate cut is a question that the governor of the Reserve Bank should answer.

While the moderation in inflation is heartening, we are not yet in a comfort zone. We will have to strike a balance as we have always struck a balance between growth and inflation.

We will have to moderate inflation without affecting growth. We will have to stoke growth without stoking inflation. It is a delicate balancing act, which I am afraid sometimes people misunderstand either unwittingly or deliberately.

This is a balancing act, I think we have balanced it reasonably well so far and we will continue to do this balancing until growth stabilizes and inflation moderates.