India will have to wait for much longer than it had hoped to play kitty party with the group of five emerging economies and draw support from a common currency pool.
Though the group of five — Brazil, Russia, India, China and South Africa (Brics) — has already agreed to a $100 billion common reserve, with China contributing the most, they are nowhere near to agreeing on how soon to make it functional.
In fact, India faced an embarrassing situation ahead of an informal meeting of the heads of Brics countries, as officials from China and Russia rebuked India for its economic mess. They suggested that India pay its own bill rather than lean on a common club for a bailout.
“We see the temporary difficulties of some Brics countries, mainly as difficulties in terms of international balance of payments,” said China’s vice finance minister Zhu Guagyao. “The policy options in response to such ... difficulties include increasing interest rates or devaluing currencies.”
India has long suspected China of wanting to dominate the Brics agenda, while it has very little common interest with Russia. So it has sought to make cause with the weaker Brics economies such as Brazil and South Africa in setting the agenda for the group. This is believed to have delayed a settlement of both the Brics Development Bank and the common currency pool.
But reacting to India’s urgency in making the common currency reserve operational, even South African finance minister Pravin Gordhan had earlier told Reuters: “We don’t know what the proposal is. This is India’s initiative to resolve India’s issues.”
Russia’s summit coordinator Ksenia Yudayeva told reporters: “The countries that faced the biggest recent capital outflows also have quite weak fundamentals.” She suggested both domestic and international factors were at play in the most troubled economies, and it was not appropriate to blame global factors alone.
Ms Yudayeva said India had not approached other Brics nations for activating the currency swap arrangement. She categorically declared: “We didn’t agree on specific measures yet,” adding that the specifics would only clear at the meeting of Brics finance ministers next month.
The currency pool, as explained by India’s sherpa at the G-20 summit, Planning Commission chief Montek Singh Ahluwalia, ahead of the St. Petersburg jamboree, will work like a common kitty from which member countries would draw foreign exchange in times of distress, with each member contributing to the withdrawal in proportion to its specific commitment to the pool.
Mr Ahluwalia had earlier raised hopes of the currency swap arrangement being discussed threadbare among the Brics members in St. Petersburg.
India’s foreign secretary Sujata Singh refused to be drawn into the controversy generated by the comments made by the Chinese and Russian officials, insisting: “I don’t want to comment on someone else’s comment on what I should be doing with my economy.” She said Mr Ahluwalia would clarify India’s stand on Friday.
Ms Singh, however, insisted that the Brics leaders did discuss the current global crisis and the common currency reserve, adding that Prime Minister Manmohan Singh “welcomed the progress of the consolidated currency reserve arrangement and noted this initiative acquired even greater salience in the current environment of global currency volatility”.
The Brics countries have already agreed to a $100 billion currency stabilisation fund to tackle volatility ahead of an expected pullback of US monetary stimulus.
China, with the world’s largest foreign exchange hoard, has committed the biggest share to the pool worth $41 billion, while Brazil, Russia and China will each give $18 billion, and South Africa $5 billion.
Asked if India’s $18 billion contribution to the pool would not deplete its precarious foreign exchange reserves further, the foreign secretary said no timeline had been drawn on making it operational, and hence fears of a further drawdown on India’s reserves were premature.
Officials of other Brics members too agreed it would still take some time for the pool to become functional.
Russian deputy finance minister Sergei Storchak joined his Chinese counterpart in suggesting that details on the common reserve had to be worked out. They hinted that beyond the announcement, there was need for much more work on the reserve facility.
A joint Brics development bank, with capital of up to $50 billion, will also take months to finalise with little agreement among member countries over burden sharing and its location.
India sees urgency in creating and dipping into a common pool since it blames the “unconventional monetary policies” of the developed economies for its current mess.
The US Fed is expected to take its first steps this month to reduce its third quantitative easing programme, with huge implications for the global financial system, as the US dollar accounts for 62 per cent of the global reserve assets.
Russia and China, both looking to dominate the Brics agenda, however, made common cause with India that the end of the Fed’s bond-buying programme could have a profound impact on the global economy and urged caution.