The royal receptions and grand speeches are fond memories now. With PM Manm-ohan Singh back home from the glitzy G20 meeting in London, it’s time for a reality check.
In the final analysis, the six pledges that the heads of G20 leaders signed on April 2, will mostly, not completely, work in India's favour. However, there’s a catch: these pledges are non-binding and hence some of them may just bring false hope.
The pledge to not repeat the “historic mistakes of protectionism” is likely to have the greatest short-term impact. The members have also pledged "to refrain from raising new barriers to investment or to trade in goods and services.” So, India could look forward to markets in, and funding from, developed countries, which had taken a hit following the downturn, to open their doors again.
However, a clause dangles at the end of this positive statement: “We extend this pledge to the end of 2010.”
Why 2010? “These are emergency measures,” an optimistic Prime Minister Manmohan Singh told reporters in a briefing room in London. “By 2010, the world economy will revive.”
The G20 nations’ agreement to “to take action against non-cooperative jurisdictions, including tax havens” is likely to hurt India the most in the short- to medium-term.
The reason: The source of India’s biggest FDI is Mauritius, a tax haven. As much as $11 billion, or two-fifths of the country’s total FDI, came from Mauritius in 2007-08. If this route is plugged, huge investments will dry up.
However, there is some hope as this African nation has moved towards implementing internationally agreed tax standards set by the Paris-based Organization for Economic Cooperation and Development (OECD) and endorsed by G20. An OECD note, released on the same day as the G20 summit, said Mauritius now falls under the “least-risky” category, meaning the country has substantially implemented the internationally agreed tax standards.
The worst offenders according to the OECD note — Costa Rica, Malaysia (Labuan), Philippines and Uruguay — are statistically insignificant to India. On the money laundering side, Swiss Banks will come under scrutiny.
“Following the name-and-shame of these destinations, sanctions will follow. Non-compliant geographies (like tax havens) or entities (like hedge funds) will have to reform. If they don’t, they will face action,” an Indian official said.
India will also benefit by getting a greater voice in the functioning of International Monetary Fund (IMF). It will participate as a $20 billion investor, a senior official said. The IMF, where India has a 1.9 per cent share that could double following the organisation’s reforms, lends to governments to fulfill their foreign exchange needs.
“The tension will come when existing countries with dominant shares will see their stakes dip,” the said. Currently, the US has the largest vote share of 16.7 per cent, followed by Japan (6.0 per cent), Germany (5.9 per cent), France and UK (4.9 per cent each). India currently stands below Belgium, Italy, the Netherlands and Russia.
So, while the US gets one executive director out of the 24 in the IMF to represent its interests, India has to share its executive director with Bangladesh, Bhutan and Sri Lanka, all of which have a 2.4 per cent share together.