Well done, India

By Raja Murthy

Guru Asia stepped forward at the Group of 20 summit in London as tutor in the art of preventing scams and recessions. "Change" was the theme of the moment. Yet given their track records, little credence and less optimism can be given to the greater role accorded to Asia, notably India, and the G-20 proclamations of reform.

In a significant shift of global economic leadership from unfettered free-market Western markets to the more government-regulated Asian versions, China, Japan and India got their way in demanding stronger regulatory practices and reform of financial institutions such as the International Monetary Fund.

The word "regulatory" appeared 11 times in the six-page London Communique compared with, for instance, it being mentioned merely twice in the five-page communique after the November 8-9 meeting of G-20 finance ministers and central bank governors at Sao Paulo, Brazil, last year.

Adding more decibels to its pro-regulatory tune, India became at the end of the London summit a full-fledged member of two key bodies - the Financial Stability Forum (FSF) and the Basel Committee on Banking Supervision.

The Basel Committee, which aims to improve banking supervision worldwide, is a member of the FSF along with other international standard-setting bodies - the committee on the global financial system, the committee on payment and settlement systems, the International Association of Insurance Supervisors, the International Accounting Standards Board and the International Organization of Securities Commissions.

The Switzerland-based FSF in turn coordinates with senior representatives of national financial authorities - such as central banks, regulatory bodies and treasury departments - as well as global financial institutions, international regulatory and supervisory groupings, the European Central Bank and committees of central bank experts. India joins current Asian members of the FSF - Japan, Hong Kong and Singapore.

"Broadening representation in these bodies is an important improvement," Prime Minister Manmohan Singh told the media at the end of the London summit. "The directions of the reform of financial regulation and supervision that have been agreed are in line with our own thinking in India."

India was entrusted with the regulatory homework for the London G-20 summit. India's Rakesh Mohan, deputy governor of the Reserve Bank of India, co-chaired with Tiff Macklem, Canada's deputy finance minister, Working Group 1, one of four preparatory working groups ahead of the summit and which was entrusted with finding ways to increase regulation and transparency of markets.

Amid the newfound love for sober economics in the face of the worst global recession since 1945, Manmohan was a surprise sachet, if not package, at the London summit.

Singh could speak with confidence, being a professional economist and former Reserve Bank of India governor. He is also due to face general elections this year. "The present [global economic] crisis does not originate in Asia or in Latin America. It originates at the heart of capitalism," he said, pointing to "the laxity of regulation" as an important cause.

India's pro-regulatory views commanded attention at the G-20 summit, unlike at earlier such gatherings when Indian prime ministers merely made up the numbers. India became the world's 12th trillion-dollar economy in June 2007, while its 9% economic growth was the world's second-fastest expansion.

Even amid the global recession, the Indian government estimates a continuing robust 7.4% gross domestic product growth rate, compared with the 1.1% for the US, the world's largest economy.

That Asia's voice should be given more credence was acknowledged in London by the summit host, British Prime Minister Gordon Brown, who agreed that India, China and Japan had a right to ask for a change in the way the International Monetary Fund and similar institutions worked.

Asian economies now account for nearly 25% of world's exports and have foreign reserves running into trillions of dollars. Japan and China together agreed to contribute $140 billion of the record $1.1 trillion funds that the G-20 pledged as loans and guarantees to developing economies.

Yet, despite the London G-20 plans to "reshape" the world's money markets, member governments continue to flunk the test of the proof of the pudding being in the eating. "Guru" Manmohan and his government, for instance, have shown little willingness to practice at home what they globally preach.

The US$1.5 billion Satyam financial scam in January 2009 (see Satyam fraud check switches to PwC, Asia Times Online, January 10, 2009) became a test case on the efficacy of the country's regulatory bodies. But the New Delhi-based Institute of Chartered Accountants of India, India's six-decade-old main regulatory accounting body, continues to dawdle over the role of Satyam auditor Pricewaterhouse Coopers (PwC).

In its investigation of the Satyam scam, in which company founder and chairman Ramalinga Raju confessed to fudging the company's books over a prolonged period, the 145,000 member-ICAI, the world's second-largest accounting association, defies logic in quoting senior Satyam officials who have denied that PwC was complicit in the fraud that involved faking profits in annual audits. In other words, the accountant watchdog was being portrayed as having no responsibility for the Satyam house being looted for seven years.

Likewise, Indian governments have a woeful track record to back the London G-20 declaration to crack down on tax havens. About $1.7 trillion to $11.7 trillion worth of assets are stashed away in such havens, according to the Paris-based Organization for Economic Cooperation and Development. Indeed, not much has changed since previous such G-20 commitments. In 2004, in Berlin, they similarly committed to new higher standards of transparency and exchange of information on tax matters.

India had a chance to crack down on powerful tax evaders in February 2008. The German government had offered to reveal names of slush-money account holders in Liechtenstein, a tax haven in Western Europe, after the Bundes Nachrichten Dienst, or BND, Germany's overseas intelligence agency, stumbled on names of 800 secret account holders in Liechtenstein bank LTG.

Countries such as the US, the UK, Canada, Italy, Norway, Sweden, Finland and Ireland used the German government offer. But not Manmohan and his government. Critics said subsequently the inaction was due to senior Indian politicians, corporate chieftains and leading stockbrokers being among the secret account holders.

The current global financial crisis itself challenges G-20 credibility. The group [1] came together as a response to the financial crises of the late 1990s. Germany hosted the first meeting in Berlin in December 1999, but 15 G-20 communiques later, the world seems to have changed for the worst as it struggles to confront its worst financial crisis in six decades. The London communique, which US President Barack Obama declared as "historic", sounds non-historically familiar.

"Recent experience has demonstrated the need to strengthen our capacity to prevent financial crisis and to develop efficient, expeditious, and socially and economically effective responses to a financial crisis when it occurs," said the Delhi communique in November 23, 2002.

Recession appears to be a guaranteed global recurrence, certainly as long as G-20 gurus forget their own lessons.

Note: The G-20 is composed of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK, the US and the European Union.