India warns on damage from G20 tension

Manmohan Singh, India’s prime minister, has appealed for “a meeting of minds” at next month’s meeting of the Group of 20 leading economies to give renewed impetus to co-ordinated financial reform and the rebalancing of the global economy.

“I’m worried about the global situation,” Mr Singh told the Financial Times.
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The Indian prime minister’s concerns about the fraying cohesion of the G20 were echoed on Tuesday night by Mervyn King, the governor of the Bank of England, who warned that tensions over exchange rates could degenerate into trade protectionism.

“That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world,” he said in a speech.

Indian officials have warned that the G20 is split between debtor countries, such as the US and the UK, and creditor nations, led by China with its large foreign exchange reserves. Undervaluation of currencies and monetary easing were complicating problems and leading to a dangerous divergence of opinion among global leaders.

The officials said that the group, which came together two years ago to help stabilise the global financial system, had lost its cohesiveness as it approached the summit in Seoul, the South Korean capital. A “clash of interests and a clash of perceptions” could result in a stalemate at the summit that would impede progress towards recovery.

“There’s no agreement on diagnosis,” one top official said. “We’ve lost consensus about how to tackle the situation. That’s my worry about the Seoul conference. The G20 is in serious difficulties.”

International tensions over exchange rates have escalated ahead of the summit as some countries have engineered the depreciation of their currencies to sharpen their economic competitiveness. At the heart of the issue lies a long-running tussle between the US and China over the value of the renminbi, the Chinese currency, which the US argues gives unfair advantage to Chinese exports.

The Korean hosts are aiming to create a new financial safety net for troubled governments and agree on banking capital accords.

The Mumbai-based Reserve Bank of India officials are concerned about a growing disconnect between the flagging economies of the west and the faster growing developing world. They regard a wave of capital resulting from the ultra-loose monetary policies in advanced economies as having a potentially destabilising effect on emerging economies.

In his speech, Mr King warned that tensions over exchange rates were hampering the necessary rebalancing of the global economy. The spirit of co-operation evident in late 2008, “so strong then, has ebbed away”, he said.

“Current exchange rate tensions illustrate the resistance to the relative price changes that are necessary for a successful rebalancing. The need to act in the collective interest has yet to be recognised, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing,” he said.

Mr King called for a “grand bargain” among the major economic powers. This would include a commitment from China and other surplus countries to increase domestic demand and an agreement on exchange rates.

Mr King hoped that if countries could agree the “right speed of adjustment” first, the growing tensions in the global economy could be averted with a grand bargain on other policies.

The US is putting pressure on China to allow its currency to strengthen. China, however, has warned that should the US Federal Reserve pump more dollars into the markets through quantitative easing it will worsen imbalances and swamp emerging economies with “hot” capital inflows.

Some economists expect China to move on its currency ahead of a visit by China’s leadership to Washington to ease tensions. But they argue that China is inflicting some of the worst damage on its low income neighbours.

“A beggar thy neighbour attitude has taken hold,” said Hafiz Pasha, a leading Pakistani economist and former finance minister. “The space for growth is smaller and China is artificially taking up too much of that space.”

“The Third World will gang up on it. We need to start complaining,” he said.

Indian officials are emphasising their fast-transforming relationship with the US ahead of a visits by President Barack Obama to New Delhi, the Indian capital, and Wen Jiabao, the Chinese premier, before the end of the year. They say that the relationship with the US has “no irritants” like a hefty trade surplus or rising foreign exchange reserves.

Moreover, there is a convergence of interests with Washington over issues such as global security in the Middle East and Central Asia. The firm footing of the relationship is expected to be underscored during Mr Obama’s visit with an agreement to buy arms from the US as India’s military seeks modernisation.

Many analysts are watching carefully for any sign that India may opt for US aircraft in a deal to supply 126 jet fighters for the Indian air force. Such an arms contract would have big implications at a time when the Obama administration is trying to revive the weakened US economy and protect jobs at home.