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Global Bank Tax Proposal at G-20

June 26, 2010

New Delhi doesn’t expect the proposal for a one-size-fits-for-all global bank tax to pass muster in the G-20 summit in Toronto on June 26-27, a senior government functionary said.

Speaking to mediapersons on board Prime Minister’s aircraft, national security advisor Shiv Shankar Menon minced few words in showing India’s disenchantment with the proposal backed by the US and some of the heavily indebted euro zone countries. “Honestly, we don’t like it (the universal bank levy). We don’t think it will go through in an undiluted form,” Menon said. The proposal for a bank levy was already discussed at the levels of sherpas of leaders and the finance ministers. During the Toronto summit, the leaders will discuss it, although what they are likely to agree on is to let national governments do what they want.

The International Monetary Fund (IMF)-backed proposal for a single global bank tax has been opposed by Brazil, Australia and Canada who have relatively stronger banks.

Menon’s statement is yet another sign of the fissures within G-20, the over-a decade-old grouping of the richest and largest economies, which was elevated to the status of a global steering committee on economic policy-making in Pittsburgh last September. With the difference of opinion among member countries over the timing and manner of withdrawing the expansionary fiscal stimuli unveiled since the second half of 2008, G-20 was already showing symptoms of messy multilateralism.

The demand for tougher bank capital and liquidity rules will be discussed at the upcoming summit, but the Basel-III norms to shore up bank capital will likely be pushed back. Basel-III will start only by 2012, not in 2011 as originally planned.

On other key proposals like financial sector re-regulation too, the Toronto summit is unlikely to come out with definite action plans, owing to lack of consensus on how to chart it out, Menon said. For more concrete outcomes, one must wait for G-20 summit in Seoul in November.

Rattled by the sovereign debt crisis, many euro zone countries are pitching for faster fiscal consolidation. However, countries whose economies are in a better shape including India could afford to withdraw stimulus rather gradually.

India, of course, is deeply interested in global growth, even as it is relatively less dependent on export demand for its economic expansion. “Sources of demand in the world economy has to be maintained,” Menon said, adding that it was important to send signals of assurance to the global financial markets.

Growth is one area where G-20 countries’ interests converge. Even developed countries have an interest in the emerging economies strengthening their sources of growth. New Delhi feels that the global recovery is still “weak and fragile.” While India is aiming at 9% GDP growth in a year or so, we are not sure if growth is very stable globally,” Menon said.

“India’s debt is within manageable levels. We are confident of halving the fiscal deficit in the next three years,” Menon said.

India will press for faster and more meaningful realignment of the influence-matrix at the two key international financial institutions: World Bank and IMF. “There is an in-principle decision to increase developing countries’ quota in the IMF by 5%. But no agreement has been reached as to how to do it,” Menon said. The World Bank reform to increase the voting power of developing and transition countries is already underway. There has already been a shift of a measly 3.13% towards the Global South.

G-20's previous job as a crisis-buster was the easier part, Menon said. This was because all members appreciated the need to salvage the world economy from a deep recession. Coordinated policy action by G-20 since the November 2008 Washington summit, when the global economy was just slipping into the sharpest downturn since the Great Depression, was indeed fruitful, Menon said. He, however, added that “the more complicated process starts now,” even as the forum members are in agreement when it comes to need to continue with the process of policy coordination.

There is the possibility of a disconnect between the national sovereignty issues and policy coordination among G-20 countries. “No G-20 member can sit in judgment on another’s policies,” he said.

A statement issued by the Prime Minister prior to his departure for the G-20 summit said: “The challenge of Toronto summit will be three-fold: To ensure that global economic recovery is durable, balanced and sustainable; to calibrate exit strategies in the light of the growing concern over expansionary fiscal policies and to focus on medium and long-term structural issues relating to governance issues. “We need investment and capital flows, as well as open and rule-based trading system that does not succumb to protectionist tendencies,” the prime minister added.

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