IMF's Lagarde, RBI Guv, Raghuram Rajan aligned on 'roof to repair' but political bosses testy on tools

After putting a (temporary) lid today on spiralling concerns over India’s new centralised indirect tax, GST, Finance Minister Arun Jaitley will head to the US next week. Here, the spotlight will shift to the wider sweep of nations and their general growth trajectory - India’s numbers still looking brighter than the average.

The number that's the darling of news headlines now is 5.7% which is the quarterly GDP growth April to June; the RBI forecast for the full year is in the mid to high 6s.

The long awaited global recovery is taking root,” Christine Lagarde, Managing Director of the International Monetary said Thursday, describing the IMF’s official global economic outlook, scheduled for release late next week, as “even more optimistic.”

Speaking at Harvard University’s Kennedy School of Government, Lagarde painted a rosier picture of the global economy compared with the previous edition of the Fall meetings of the IMF and World Bank.

“Policymakers should use all tools at their disposal to act now, and take advantage of the period of global growth. As I said, let us not let a good recovery go to waste,” Lagarde said, setting stage for the maha kumbh of economics in downtown Washington D.C all of next week.

But this isn’t the first time that the IMF sounds chirpy. The semi annual World Economic Outlook (WEO) released this Spring raised forecast for global growth in 2017 to 3.5% but the Fund’s forecasts have been far from perfect.

IMF chief Christine Lagarde/ AFP

IMF chief Christine Lagarde/ AFP

Since the Wall Street led crash of 2008, the IMF has rejigged its forecasts every year since 2010. Going by even more recent track record too, spring forecasts have been optimistic and all of those numbers are still less than India’s numbers, despite the so-called “slowdown”.

The annual autumn meetings of the governing board of the World Bank Group (WBG) and the International Monetary Fund (IMF) brings in an influx of 12,000 eco-brahmins including central bankers, finance ministers, politicos, moneybags and academics.

The Global Financial Stability Report and the World Economic Outlook, the two signature documents that will be in full media glare will help frame each country’s situation in a wider arc of a world on edge.

Lagarde, in her avatar as a former finance minister (too), spoke at Harvard on several issues of central banking and monetary policy. Though hers were broad brushstrokes, the themes are similar to what RBI Governor Urjit Patel said in an India context barely a day or two ago - especially when he replied to a pointed question on whether it is time for a fiscal stimulus.

“You, know given the general government fiscal deficit or in other words central and states debt combined that is already in the region of 6% of GDP and that can hardly be described as tight. We must be very cautious lest we undercut macroeconomic stability,” Urjit Patel said.

Here is Lagarde’s answer to the same theme, delivered at the Kennedy School: “Our fiscal message is subtle. Those countries who are in surplus should take the chance and invest and improve their factors of productivity. For those economies where the debt is clearly up, that is not the time for expansion. It is time to stabilise. For all of them, they should have a growth friendly fiscal policy.”

Jaitley will also be speaking at Harvard next week before travelling to Washington DC. His speech will be at Harvard’s South Asia Institute on India’s tax reform.

India’s GST has also figured in World Bank chief’s comments ahead of the Fund Bank meetings - “There’s been a deceleration in the first quarter, but we think that's mostly due to temporary disruptions in preparation for the GST, which by the way is going to have a hugely positive impact on the economy," while Lagarde spoke at Harvard on the bigger question of when is the right time to fix stuff - when things are going fine or during a crisis?

"Either you sit back and bask in the sun and wait for the next crisis to proceed with the change you wanted.... Championing change when things are getting better is particulalrly tough. Just because something is politically difficult does not mean we must shy away from it", Lagarde said in her talk titled - “A time to repair the roof”.

Raghuram Rajan, India’s former RBI Governor, also writes on some of these emergent themes in the Chicago Booth Review: “Every central banker in an emerging market has had the experience of the government calling her up and telling her all sorts of interesting things it can do with her balance sheet. Usually the response has been a polite no. But if you have a large balance sheet that is being used without any connection to monetary policy, it can be hard to turn down such requests.”

His parting line is telling, and like Lagarde’s talk, seems to apply across geographies for its appeal to practicality if not anything else: “Central banks essentially said, “Give us a mandate, and don’t place constraints on how we achieve it—that is, give us operational freedom.” That may have worked fine when the primary instrument of central-bank policy was the policy rate (and some marginal tweaks to liquidity). It no longer works because there’s so much central banks can do. That is, there are no assets central banks cannot buy, and no borrowers they cannot fund. It opens the door for politicians to start questioning why it is that central banks have so much freedom. In the process of expanding central-banking capabilities and doing what it takes to achieve their mandate, central banks may have inadvertently exposed themselves to political scrutiny and, eventually, a loss of central-banking independence and power.”

Many of these expert views tie neatly into what’s happening outside of the US. But after the last expert has left the lectern from the Fund Bank meetings, geopolitical worries, climate shocks and terror related fears will both dominate the proceedings as well as fill the gaps no expert can answer. At least for now.


Published Date: Oct 06, 2017 07:47 pm | Updated Date: Oct 06, 2017 08:10 pm