India may save the day at G20 meeting in South Korea

In the days leading up to this week’s meeting of leaders of the Group of 20 economies in Seoul, the air is thick with rancorous charges and counter-charges, and the prospect of an all-out currency war has cast a dark shadow.

Although China was initially expected to come under pressure for its refusal to allow its currency, the renminbi, to appreciate, the focus has in more recent days turned to the US Federal Reserve Board’s announcement of a second round of quantitative easing (QE2) as part of another effort to revive the down-and-out US economy.

Chinese and Russian authorities have been hectoring the US, saying the Fed action had added to uncertainty in financial markets; and last week, the German finance minister added to that shrill rhetoric by describing US economic policy as “clueless”. The prospect of a showdown between the US and China has accentuated fears that the G20 meeting could end in failure, which won’t help business and consumer confidence.

But now some analysts reckon that quiet diplomacy by an unlikely economic force — India — might save the day at Seoul. “The astute policy conduct and soft power of (India) will probably secure a positive outcome this weekend in Seoul,” reasons Societe Generale’s chief Asia economist Glenn Maguire.

India has “significantly extended” its ‘soft power’ influence in the period following the financial crisis, and its participation in and influence in the global economic and financial architecture is “growing at a rapid rate,” he adds.

Maguire points out that the Indian delegation to earlier G20 dialogues in Washington and London were given “unique respect” — which he attributes to the “unique economic expertise” of Prime Minister Manmohan Singh and the influence of the then-RBI deputy governor Rakesh Mohan. In fact, he reckons, the RBI has garnered considerable ‘soft power’ in the G20 forum largely on the strength of the quality of its central bankers.

“Whilst the pre-crisis central banking orthodoxy viewed India’s central bank as overly cautious and lacking nimbleness, post-crisis, the views of Governor Y V Reddy, who had always been sceptical of the inflation-targeting orthodoxy, believing that it blinded central bankers to the dangers of asset price bubbles forming suddenly, seemed prudent, rather than cautious,” notes Maguire.

And India has been using this new influence to great effect.  At the London G20 meeting, for instance, India pushed strongly for a joint monetary and fiscal policy response to the crisis. Singh’s statement then that the initial policy response was too timid and that “the risks lie in doing too little rather than too much” became the mantra for policymakers globally, points out Maguire.

India also pushed for a trebling of the IMF’s resources and making a fresh allocation of Special Drawing Rights and additionally supported an increase in IMF quotas.

And although China was seen as benefiting directly from the increase in the fresh allocation of SDRs and IMF quotas, India benefited from the promise to increase lending from multilateral development banks such as the World Bank and the Asian Development Bank — of which India is the largest customer.

And in the lead-up to the G20 meeting, while other countries have been bickering with the US Fed action, India “appears to be defining the rules-of-engagement for further quantitative easing,” notes Maguire.

In contrast to the debates on currency appreciation and current account targeting, India has chosen to exercise a quiet diplomacy and air its grievances with other emerging markets behind closed doors, notes Maguire. “There will be no loss of face for any economy that chooses to support an Indian proposal on global financial policy or its side-effects, intentional or unintentional.”

It’s no coincidence that US president Barack Obama was in New Delhi just days ahead of the G20 meeting, says Maguire. The US, he adds, is looking for an economic ally in a region that largely holds the US responsible for both the aftermath of the Asian crisis of 1997 and the cause of the global sub-prime crisis of 2008.