On December 1, 2022, India took over the G20 presidency from Indonesia with the theme of Vasudhaiva Kutumbakam (One Earth, One Family, One Future).
On that occasion, Prime Minister Narendra Modi authored an article in which he outlined India’s vision for the G20 presidency and pitched for hope, healing, harmony to deal with pressing global challenges.
Under its presidency, India will host over 200 meetings covering more than 30 workstreams. As part of the G20 Finance Track, the first G20 Finance and Central Bank Deputies Meeting under the Indian presidency took place in Bengaluru on December 13-14, 2022. The first meeting of the Development Working Group under the G20 Sherpa Track also commenced in Mumbai on December 13, 2022.
During India’s G20 presidency, substantive deliberations across broad priority areas would revolve around inclusive and sustainable growth; accelerating achievement of the SDGs; green development and LiFE (Lifestyle for Environment); public digital infrastructure; reforms of multilateral financial institutions; and international peace and harmony.
High expectations in an uncertain world
India’s G20 presidency comes at a difficult time when the global economic outlook for the next year remains bleak. The IMF and other international agencies have scaled back a number of G-20 country forecasts, with risks shifting to the downside.
As we move into the year 2023, we anticipate the following four issues will impede post-COVID recovery:
- High inflation.
- We expect energy and food prices will remain high in 2023, linked to the ongoing conflict between Russia and Ukraine. The high prices of energy and food items will continue to have a significant impact on inflation, public finances, and external finances, especially in countries that are net importers of these commodities.
- In Q1 2023, we anticipate a shallow recession in Europe due to the energy crisis, and in the US due to aggressive monetary tightening by the Federal Reserve (Fed). Due to trade linkages, export-oriented EMEs (such as Mexico, CEE economies, and Asian Tigers) will be highly vulnerable to a downturn in the US and eurozone. Quantitative tightening, rising interest rates, and the stronger US dollar will pose new financial stability risks to EMEs that are still recovering from the economic damage inflicted by the COVID-19 pandemic. As the Fed tightens monetary policy to contain inflation, external financial conditions of EMEs could further deteriorate amid the depreciation of local currencies, weakening of balance of payments, and lower foreign exchange reserves. Debt sustainability issues will emerge for some EMEs due to increasing interest rates and capital outflows. Nomura’s early warning model of EM exchange rate crises shows that Egypt, Romania, Sri Lanka, Turkey, the Czech Republic, Pakistan, and Hungary are most vulnerable to an exchange rate crisis in the next 12 months. Many EMEs will continue to face additional domestic challenges. Overall, we anticipate significant downside risks to the EME growth outlook during the year 2023.
- Geopolitical risks will remain elevated during the year and will determine economic integration policies.
In this global context of mounting financial vulnerabilities and heightening geopolitical tensions, India will have to steer discussions and drive collective action at the G20 to advance global economic stability and peace. It is not an easy task to develop international cooperation at a time when the global economy is becoming increasingly fragmented and distinct geopolitical blocs are on the horizon.
Aside from domestic constituents and stakeholders, international eyes are also on India, as the country has always been a voice for the poor and developing world in the international fora.
This historic role brings additional responsibilities as many non-G20 countries (particularly from the global South) look upon India to voice their concerns at the G20, whose decisions shape their economies. As the G20’s poorest country, expectations from India are much higher than any other member country, as poor countries would expect India to speak on their behalf at the G20, where they have no representation at all.
Addressing the unfinished agenda of global financial reforms
The global financial reform agenda is one policy area where India could make a significant contribution as part of its G20 presidency.
At all international forums, India has consistently pushed for the IMF’s quota and governance reforms. The 16th review of IMF quotas was supposed to be completed by 2020, but it has now been pushed back to the end of 2023. Given current trends, an agreement is unlikely to be reached before 2025, and implementation may well extend into 2028. This is unacceptable. India should rally other G20 members’ support and push for an early agreement and its implementation. If the IMF wants to regain credibility and effectiveness, its governance structure must be more inclusive, and quota reviews must be more comprehensive.
After the G20 Summit in 2008, the representation of emerging market economies or EMEs in technical forums (such as Financial Stability Board, Basel Committee on Banking Supervision, and International Organization of Securities Commissions) has considerably increased, but the challenge is to make such forums more inclusive by inviting representation from systemically important non-G20 EMEs such as Thailand and Chile.
Managing volatile capital flows is another issue that has not been adequately addressed by the Finance Track of the G20. Not only India, but a large number of EMEs are currently experiencing rapid capital outflows and currency depreciation as a result of aggressive monetary policy tightening by the US Fed and other systemically important central banks.
In an ideal world, swift international policy coordination would manage the spillover effects of monetary policy normalisation in the US and other advanced economies. But the Fed and other advanced central banks have not shown any interest in establishing some form of international monetary policy coordination.
Rather than relying on international coordination, emerging market or EM authorities must make full use of the policy levers at their disposal to strengthen macroeconomic fundamentals and policy frameworks in order to mitigate the negative consequences of cross-border spillovers. To insulate their economies from volatile capital flows, EM policymakers should proactively use macroprudential tools, capital controls, and currency-based measures.
With its limited capital account liberalisation and controls on both inflows and outflows, India serves as a model for others, particularly EMEs, in this regard. Under its presidency, India should deliver a new policy framework to regulate volatile capital flows for financial stability, going far beyond the limited measures suggested by the IMF in its latest Review of the Institutional View on the Liberalization and Management of Capital Flows (2022).
India should also initiate discussions at the G20 to mobilise resources for new and existing regional financing arrangements, as part of building a robust global financial safety net that can help in identifying, preventing, and mitigating financial crises of various kinds.
G20’s credibility at stake
The stakes are high for the G20 as well, as internal squabbles and a lack of focus are increasingly challenging its credibility.
The G20 is considered the premier forum for international economic cooperation, but it does not have a permanent secretariat, a legal framework or treaty to back up its decisions, or a formal enforcement mechanism to implement its decisions.
If you are in Thailand, Nigeria, or Colombia, you will often hear questions being asked about the legitimacy and accountability of the G20. Such questions cannot be dismissed lightly.
As a self-appointed forum, the G20 does not have clear and objective criteria for membership. Its membership is grossly lop-sided and unjust: Europe is over-represented, Africa is under-represented, and low-income countries have no representation at all. Nevertheless, the G20 decisions on financial reforms, climate change, taxation, and development policies have an impact on all countries. This is not a good model to promote inclusive multilateralism in the 21st century.
On the other hand, its proponents argue that the G20’s small membership allows for swift policy actions when existing multilateral institutions with large memberships are unable to do so. They also cite GDP and the population represented by G20 membership as justifications for addressing issues of international significance.
People frequently make comparisons between the G20 and the G7, which no longer represent the world’s top economies. Without a doubt, the G20’s more inclusive and diverse membership is a welcome development in comparison to the G7. The G20 process is also more open and transparent than the G7 meetings, allowing diverse stakeholders to influence the process.
However, to thrive where the G7 has failed, the G20 must rethink its membership. A beginning can be made by reducing European countries’ overrepresentation in the G20. For instance, three European countries – Germany, France, and Italy – have separate representation in the G20, in addition to the EU. Their interests may be sufficiently represented by the EU’s G20 delegation, considering their influence in the European Parliament, while these three seats could be granted to Nigeria, Iran, and Thailand, given their regional significance.
Of course, European countries will not voluntarily relinquish their G20 seats. What is required is a concerted effort on the part of India and other developing member countries to persuade their European counterparts that the G20 should reflect the reality of the global economy and become a more representative grouping by inviting countries from the global South. This may also aid the G20’s self-legitimation.
Another option for expanding core membership is to establish a permanent ‘G20 Plus’ arrangement. Because such a decision would require the approval of all member countries, India could initiate preliminary discussions with existing members to explore this possibility.
The G20 presidency invites guest countries to attend the summits each year. To emphasise the importance of debt restructuring under its presidency, India should invite Sri Lanka and other developing countries facing acute debt distress to participate in the G20 deliberations.
Losing momentum and effectiveness
Some may contend that the G20’s output legitimacy – that is, its ability to act quickly and provide solutions to pressing global problems – can compensate for its lack of legitimacy. However, the G20 is struggling in this area as well. The G20 was effective during the initial phase of the 2008 global financial crisis but delivered less successful outcomes in the post-crisis summits once the urgency had lessened.
Unlike the first three summits (Washington in November 2008, London in April 2009, and Pittsburgh in September 2009) that resulted in a globally coordinated policy response to protect the world economy from the financial crisis, the G20 has now lost focus as it has ventured into numerous policy arenas, often with no actionable outcomes. Its ever-expanding agenda adds to the complexity of the negotiations.
As noted by John Lipsky, former first deputy managing director of the International Monetary Fund, the problem is not the worthiness of the new issues but the overloading of the agenda with issues that dilute the focus of the summits. Subsequent summits lacked the kind of solidarity and momentum needed to engage in concerted efforts to address the global challenges seen at the London summit.
This is not to deny that the G20 in recent years has endorsed the global agreement on international taxation, backed a $650 billion allocation of Special Drawing Rights, and launched the Debt Service Suspension Initiative or DSSI (a debt-relief program for low-income nations suffering from the pandemic), followed by the Common Framework to help low-income countries restructure their debt.
Although initiatives like the DSSI and Common Framework are unprecedented, few countries in debt distress have applied due to the inherent limitations of these initiatives, especially the narrow scope of debt servicing and the non-participation of private creditors.
The outcomes of recent summits have been modest. In addition to a lack of coherence and continuity in the agenda, there is uneven progress across countries and policy areas. Several policy decisions have made little or no progress toward implementation as intended. This is evident in the efforts made by the G20 to harmonise global accounting standards. T
he growing gap between agreed commitments and their implementation undermines the credibility of the G20. Of course, not much could be achieved given the voluntary nature of the G20, but the London Summit is a reminder that swift and concrete collective action is possible. At today’s critical moment for the global economy, the world awaits a similar collective approach. Otherwise, people are going to ask: What do G20 summits achieve?
Understandably, delivering structural solutions is not an easy challenge, as it necessitates consensus among G20 members on shared economic policy frameworks, as well as the consent of national parliaments for undertaking domestic policy reforms. All of these factors contribute to the expanding chasm between commitments and their implementation. Given the voluntary nature of G20 obligations, individual countries often do not implement necessary domestic policy reforms in accordance with their commitments. Given this harsh reality, there is an urgent need to moderate expectations of what can be achieved by the G20 – an informal international grouping.
Nevertheless, it is of paramount importance that the promises made at the G20 are earnestly implemented and that the benefits reach the most vulnerable countries and communities. If the G20 does not offer innovative solutions to the world’s most pressing problems promptly, the rest of the world will continue to question its relevance and value.
Kavaljit Singh works with Madhyam, a policy research think-tank based in New Delhi.