IMF is wrong: India doesn’t have to wait till 2029 to be a $5 trillion economy; it can still be done by 2025

“There’s no such thing as a free lunch.” How true was Milton Friedman, the American Nobel Prize-winning economist about capitalist society and the capitalist world? In the world of ‘friends with benefits’, the large, gigantic, respected institutions have become just another medium of cashing in on opportunity, promoting business, enhancing profitability, even if it means one needs to climb on the bodies of the poor, hungry, or even dead. One such great institution came into existence in 1944 in an era of the post-Great Depression of the 1930s — the International Monetary Fund (IMF). The World Bank and IMF both were created as part of the United Nations with an aim to alleviate poverty and bring stability to economies across the globe. Whilst World Bank invests or lends in longer-term projects across developing nations, IMF is expected to stabilise currencies, countries, and financial systems as the modern world, modern societies and modern economies are conjoint and conjunct. If an economy collapses, the domino effect can collapse the world economy or can lead to a ripple effect, or can cause economic shock waves, running through the continents. Thus the IMF acts swiftly and is expected to lend a helping hand to a collapsing economy. What’s the problem then?  The IMF has nearly 190 countries; however, countries that contribute to the war chest of the IMF get more voting rights. The US is the largest contributor with $115 billion in a trillion-dollar balance sheet (drawing power of IMF), with 16.5 per cent voting rights, followed by Japan with 6.2 per cent, China with 6 per cent, Germany with 5.3 per cent, and France and the UK with 4 per cent each. The countries with higher voting rights enable the IMF by providing more funds to the coffers of the IMF, alongside pushing their capitalist agenda by putting the conditions while lending money to countries under duress. Though IMF has mostly worked as a saviour, White Knight, guardian angel, the result has been contravening, contradictory, and conflicted. This also reminds me of Christopher Columbus, the famous explorer and voyageur, the one who accidentally found America on his way to find Asia in the East. Describing his first encounter with Native Americans, he wrote: “They… brought us parrots and balls of cotton and spears and many other things, which they exchanged for the glass beads and hawks’ bells. They willingly traded everything they owned…They were well built, with good bodies and handsome features…They do not bear arms, and do not know them, for I showed them a sword, they took it by the edge and cut themselves out of ignorance. They have no iron. Their spears are made of cane…They would make fine servants…With fifty men we could subjugate them all and make them do whatever we want.” How can a small force of the IMF subjugate country after country? Obviously, countries or their policies or their leaders who have shot themselves in their own foot approach the IMF and not vice-versa. One such case in point is Argentina. At the beginning of the last century, the second-largest country in South America boasted of being one of the wealthiest countries on the planet. Until World War I, its per capita income was similar to that of the US. It was one of the largest exporters of cereals and meat, to the point of representing almost 7 per cent of all international trade. Argentina accumulated 50 per cent of the GDP of all Latin America in 1913; the average salary in Buenos Aires was up to 80 per cent higher than in Paris. Then came the wars, followed by infamous decades of military coups, excessive borrowings, freebies and commercial protectionism. By the beginning of the new century, the country was on the brink of a collapse. There came the saviour with conditions and a bait of a $20 billion loan package and standby credit facility. On 5 September 2000, When Argentina was facing severe depression, with 20 per cent of its workforce being unemployed, a technical MoU was signed between Argentina’s Central Bank and the IMF with an understanding that the government budget deficit required to be cut from $5.3 billion in 2000 to $4.1 billion in 2001. Furthermore, the country was asked to cut 20 per cent of monthly salaries paid under an emergency employment programme for the weak, poor and vulnerable, a 15 per cent cut in civil servant salaries, and a pension rationalisation by 13 per cent for the elderly. Following several austerity measures, industrial production fell by 25 per cent in Q1 2001 before it collapsed completely by 2002, drowning the labour market, and bringing workers into a desperate situation. Whilst the country was crumbling on account of its past misdeeds, the IMF continued to incarcerate indirectly with a false sense of belief that austerity measures will lead to an eventual bounce-back in the latter half of 2001. Before one understands the present, one needs to delve into the past. In 1991, when inflation went spiral in Argentina multiple times, an intelligent thought was enacted by the Argentinian government and IMF to solve the country’s deficit problem, where the Argentinian currency Peso was pegged to the US dollar 1.4:1 with full and unlimited current and capital account convertibility. Thus Argentina was able to place its bonds with the US and European banks and lenders. Banks did not do this for free and earned a hefty risk premium of 15-16 per cent over and above the US treasury. Thus risk was priced well and in case of default the lenders should have taken the haircut, on the other hand, IMF acted to protect the interest of lenders by acting as their proxy. In 2002, Argentina owed $128 billion in debt. Normal interest plus the premium amounted to $27 billion a year. Most of the bailout money and cost savings done on account of austerity ($3 billion) were used to pay off foreign banks and US creditors who owned the bonds of Argentina. Even the amounts earmarked for education and healthcare expenses of the country were diverted to pay off banks and creditors. Despite that, the sovereign default occurred on $93 billion of debt in December 2001. As the US dollar and peso were pegged at 1:1.4 (Whilst peso may not have been even worth 1:50), the rich, the corrupt, and influential foreigners and locals both took money out from Argentina to the US and other Western countries. Some say, as much as $750 million per day was sent out of the country. Protests, use of force, and deaths gobbled up the streets of Argentina, but financiers mostly sat pretty. [caption id=“attachment_10645671” align=“alignnone” width=“640”]  People protest against the government’s decision to reach an agreement with the International Monetary Fund, in Buenos Aires, Argentina, 27 January, 2022. AP[/caption] Today after two decades of that episode, Argentina still is not out of the woods; it owes $44 billion (one of the biggest borrowers of IMF), and remains one of the poorest countries in South America with 35.4 per cent of its population living under poverty. Over half the children or the future of Argentina staring at poverty and just five months back, the inflation in Argentina remained at a whopping 50 per cent. Labour unions continue to protest. Does one wonder what the IMF has solved for? Being such a harsh critique of the IMF is not good. Some of the countries that have been supported by the IMF and did turn around include Poland. In 1989, Poland after the fall of communism transitioned into a market economy. Same challenge, inefficient public institutions, huge government debt, high levels of corruption, and they too approached the IMF, and the rest of the story is exactly the same as Argentina. The only twist came in Poland that they officially never defaulted on their sovereign debt and they negotiated well with the cartel of lenders (like Paris club, London Club) holding Polish debt and forced them to take haircuts. Today Poland owes nothing to the IMF and is the fastest growing economy in Europe. The dichotomy of the IMF is that the IMF uses the same rule book every time which even a young student of economics knows will be counterproductive. The austerity measures on the crumbling economy push it into further depression and then recession, reducing the tax base and tax collection, halting the economic activity. The smart, skilled and enterprising population leaves the country to add value to other developed markets at one-third the cost whilst the country in question keeps staring at poverty deeper and deeper. Instead of curbing corruption, tax evasion, and misuse of public money through public institutions, the IMF attacks the financial sector and vulnerable segments of the country, both leading to the collapse of social systems in the countries. This is true for all aids including the one given to Greece, Egypt, and Pakistan amongst many others. Almost none of them (exceptions are far & few) have come back on their feet. Not only in matters of assessing the social and economic impact on the countries aided by the IMF, but the IMF has also gone wrong in foreseeing what’s coming ahead. A few of their recent conundrums include the following:

• On 12 January 2022, the IMF predicted that the US inflation will cool off in Q2 CY 22. In March 2022, US inflation stood at 8.4 per cent, and for April 2022, expected to inch higher.
• In October 2021, IMF predicted Saudi Arabia’s economy will grow by 2.4 per cent in CY 21, it clocked a whooping, 3.2 per cent (33.33 per cent higher than a revised prediction, early July 2021 prediction was even lower than 2.4 per cent).
• In March 2021, the IMF applauded China’s policy of debt trap on African nations, obviously in polite words, now is in loggerheads with the West. (The IMF’s financiers)
• The IMF played its role in pushing its agenda to countries like Ukraine, and Kazakhstan in the post-1991 Soviet dissolution regime. Thus trying to align with the West, and aggravating the Cold War; results are visible now.
• In his 2002 book, Globalization and Its Discontents, Nobel Prize-winning economist Joseph Stiglitz denounced the IMF as a primary culprit in the failed development policies implemented in some of the world’s poorest countries.
• In November 1996, IMF trumpeted the ASEAN’s sound fundamentals for sustained economic growth; by July 1997, ASEAN fundamentals changed to the Great Asian Crisis.

Now it is confusing to investors/natives of India that India’s economy will slow down and reach a target of $5 trillion only in FY 2029, thereby growing at 8.15 per cent for FY 23, and dropping to sub 7 per cent for forthcoming years with 6.17 per cent in FY 28 with Rs 94.40 to a US dollar. The IMF owes this delay in achieving this milestone on account of higher oil prices and the Russian invasion of Ukraine. However, one forgot the government’s outlay of Rs 111 lakh crore (Rs 3.5 lakh crore spent in FY 20) on the infra pipeline to be executed by 2025, PLI & DLI scheme, which has given a fillip to domestic manufacturing acting as India’s growth engine. There is a belief that losses from COVID-19 may take up to 12 years to recuperate. However, one overlooked the fact how COVID-19 brought cost efficiencies as well as a rise in health care, IT, AI & ITES. The way COVID prompted the adoption of the China+1 policy and the way Ukraine’s conflict with Russia prompted the world to strengthen the food supply chain with India, shifting out from Ukraine and Russia, is and will continue to lead to a better agri realisation for farmers and agri commodity dealers in India. Furthermore, one million IT professionals in Ukraine, Belarus, and Russia (distraught by war), forming Eastern Silicon Valley, are being supported by Indian tech companies, adding to India’s GDP. The IMF anticipates a systematic rise in the US dollar and a systematic devaluation of the rupee. However, with Saudi Arabia looking for new partners for direct long-term deals, it can lead to a collapse of petro-dollars, if oil, gas and coal are settled outside US dollar, as China has done with Russia for a 30-year gas contract to be settled in euro. To reduce the oil bill, India has done in the past and continues to enter into smart contracts (including barter) with all oil-producing countries at discounted rates. Such deals are known in the public domain. As China continues to reel under the pressure of COVID and supply chain challenges, refined crude in the form of petrol and diesel is exported by India with India’s refining capacity operating above the 100 per cent mark. The demand for energy and electricity remains robust and buoyant, reflecting hyper-industrial activity in India. Capacity utilisation has reached pre-pandemic levels and is expected to strengthen as demand post opening up of the economy remains buoyant. Segments, such as agriculture, forestry, fishing, which were supposed to be the laggard and baggage of the Indian economy, are growing at 6.7 per cent in FY22 over FY20 numbers. With agri reforms, agri demand and strong smartphone penetration, rural Bharat will rule and lead India, along with manufacturing and services to a $5 trillion economy not by 2029 but by 2025. In such a scenario, can the intentions, estimates, and projections of the IMF be relied upon? It’s time to rethink. Siddhartha Rastogi is Managing Director & COO, Leading Full Service Investment Bank. Views and opinions expressed in this article are those of the authors and do not necessarily reflect the official view or position of any company or sister concerns or group company where the author is presently employed. Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.