Manmohan Singh heads for St. Petersburg G20 Summit
Sep 02 2013 , New Delhi
“Currency swap among BRICS will be discussed…It will not be part of G-20 but on the sidelines. BRICS will be updating on what they have agreed upon last year for $100 billion currency reserve fund,” planning commission deputy chairman, Montek Singh Ahluwalia, who is India’s sherpa at G-20, said.
The five-nation BRICS comprise India, Brazil, Russia, China and South Africa. India, Brazil and South Africa are among the emerging economies which have witnessed sharp depreciation of their currencies in recent weeks and this currency reserve fund will help ease short-term foreign currency liquidity pressure
Currency volatility will be important part of G-20 summit beginning on September 5, Ahluwalia said adding anticipated withdrawal of quantitative easing in the United States will lead to change in flow of currency leading to volatility. It would be in national interest of those advanced countries to calibrate QE tapering in a manner that keeps in mind the impact on emerging countries like India.
India and other emerging economies are keen that the spillover effect of QE tapering is minimal in developing countries, Ahluwalia told reporters on Saturday, shortly before his departure to St Petersburg..
Ahluwalia, however, said an announcement by BRICS on the Brics development bank is unlikely at St Ptersburg as more work was needed. BRICS has proposed to set up the bank with $50 billion initial capital with each of the five-member countries contributing $10 billion.
Last week, People’s Bank of China (China’s central Bank) deputy governor, Yi Gang said in Beijing that BRICS group have agreed on the ratio of contributions, operation mechanisms, governance structure and loan-to-value ratio of this contingent reserve arrangement that is the BRICS currency swap arrangement.. There will be more consensus on the arrangement in St Petersburg and expected this arrangement to be launched in foreseeable future.
China, which is a current account surplus country with huge foreign exchange reserves of close to $3 trillion, will be major contributor to the BRICS currency fund and indications are half of the $100 billion would be contributed by Beijing.
India already has currency swap arrangement with Japan. Ahluwalia made it clear that currency swap is not rupee trade.
“This is not bilateral currency settlement,” he said adding It is a straightforward cooperation in liquidity. The five BRICS countries will agree to make certain amount of foreign currency available. The country in need of foreign currency will draw from the pool to meet its short-term requirement. It is a cooperative arrangement. There will be certain rules for drawing from the pool, he said.
The first level of safety net is foreign exchange reserve. The second level of safety net is informal arrangement like currency swap arrangement, Ahluwalia said.
The third form of safety net is seeking a loan from International Monetary Fund, where loans are made available with certain conditionalities.
Ahluwalia was categorical in saying that the possibility of India looking at the third option of IMF did not arise as India had a very comfortable foreign exchange reserves of around $280 billion
“I am not aware of any plans to go to IMF. I don’t think our current situation warrant that. We do not need to go. We have adequate foreign exchange reserves,” Ahluwalia said emphasizing “It is not in agenda.”
Ahluwalia said the issue of energy subsidy too would come up at G-20 meeting and India was in agreement with G-20 that “we must cut down fossil fuel excepting the targeted ones.”
“We do not have any real difference in this broad approach,” Ahluwalia said India has made only commitment to G-20 to keep fiscal deficit at 4.8 per cent of GDP this financial year. Both Prime Minister Manmohan Singh and Finance Minister P Chidamaram have made it amply clear that is a “red-line” and would not be crossed.
When pointed out that fiscal deficit at the end of July was already 63 per cent of the budgeted target for the whole year, Ahluwalia hinted if there was need to cut plan expenditure as was the case last year, planning commission would not have any hesitation.
“If we are asked to do so (cut plan expenditure), we will cooperate,”Ahluwalia said adding any such cut would be contemplated only when revised estimates are prepared for plan expenditure in November,
He also said the current account deficit will be kept at targeted level of $70 billion or 3.7 per cent of GDP this financial year. But the current account deficit in the first quarter of this financial year would be higher than 3.7 per cent of GDP as there was unusually high gold imports in the month of April and May. Gold imports have since started decreasing due to several actions taken by the finance ministry and RBI.