VZCZCXRO8865
RR RUEHAST RUEHBI RUEHCI RUEHLH RUEHNEH RUEHPW
DE RUEHNE #2909/01 3171321
ZNR UUUUU ZZH
R 121321Z NOV 08
FM AMEMBASSY NEW DELHI
TO RUEHC/SECSTATE WASHDC 4156
RUEHAK/AMEMBASSY ANKARA 1464
RUEHBJ/AMEMBASSY BEIJING 7138
RUEHRL/AMEMBASSY BERLIN 1034
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INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
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UNCLAS SECTION 01 OF 04 NEW DELHI 002909 
 
SIPDIS 
SENSITIVE 
 
STATE FOR SCA/INS AND EEB/DAS NELSON 
STATE FOR EEB/OMA: MSAKAUE/AWHITTINGTON 
USDOC FOR ITA/MAC/OSA/LDROKER/ASTERN/KRUDD 
DEPT PASS TO USTR CLILIENFELD/AADLER/CHINCKLEY 
DEPT PASS TO TREASURY FOR OFFICE OF SOUTH ASIA MNUGENT 
DEPT PASS TO TREASURY/IMB: BMURDEN/WMONROE/CCARNES 
TREASURY PASS TO FRB SAN FRANCISCO/TERESA CURRAN 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ECPS EFIN EINV ENRG EPET ETRD IN
 
SUBJECT: INDIA G-20 SUMMIT GOALS: SECURING A VOICE IN GO-SLOW REFORM 
DELIBERATIONS 
 
REF A: SECSTATE 114420  REF B: NEW DELHI 02805 
 
¶1.  (SBU) Since President Bush's invitation to participate in the 
G-20 Summit on November 15, India has gone into idea gathering mode 
- soliciting input from industrialists and think tanks, but mainly 
looking to a core set of government economic advisers, including 
summit Sherpa Montek Singh Ahluwalia (see reftel B), Ministry of 
Finance Chief Economic Adviser Arvind Virmani, the Prime Minister's 
Economic Advisory Council and the newly inducted economic adviser to 
the PM, former IMF economist Raghuram Rajan.  PM Singh, one of only 
two G-20 Prime Ministers to have also been a Finance Minister, has 
made several public statements signaling GOI intentions for the 
summit.  The PM has stated that there was a regulatory and 
supervisory failure in the developed countries.  He has called for 
setting up special financing facilities with less conditionality, 
aimed at helping developing countries finance critical expenditures, 
especially in infrastructure.  He has also remarked that the current 
system needs reform.  Conversations with members of the PM's core 
team suggest, however, that expectations for the summit itself are 
low and that India will prefer to go slowly on implementing global 
architecture reforms.  India appears to view the financial crisis as 
a moment for it to increase its voice in the global financial 
system.  While India appears to still be defining its exact future 
role, importantly, it would seem to include a continued commitment 
to financial liberalization and integration. 
 
PRIME MINISTER CHARTS A COURSE 
------------------------------ 
 
¶2. (SBU)  Nearly all the public comments on the proper course for 
the G-20 Summit and India's participation have come from Prime 
Minister (PM) Singh.  This is probably a function of the PM's 
superlative economic credentials, being the only G-20 PM, besides 
Gordon Brown, to have been a finance minister.  Singh's resume also 
includes a stint as central bank governor, creating a rare 
combination of technical expertise and historical experience in 
addressing the current global financial crisis and India's role in 
it. 
In Beijing in late October, Singh identified three failures as the 
cause of the financial crisis: a regulatory and supervisory failure 
in developed countries; failure of risk management in private 
financial institutions, and failure of market disciplinary 
mechanisms. 
 
¶3.  (SBU) His prognosis was that coordinated global action is needed 
to restore confidence in credit markets and suggested that 
institutions like the World Bank and the IMF set up a facility with 
less conditionality to help finance countries that need it.  The PM 
further refined his remarks while in Oman this past weekend, when he 
noted that India was working closely with other Asian countries to 
ensure coordinated policy action and declared that it was necessary 
to review the role of international financial institutions to ensure 
"better supervision, regulation and early warning." 
 
INCLINATION TO GO SLOW 
---------------------- 
 
 
NEW DELHI 00002909  002 OF 004 
 
 
¶4.  (SBU)  Embassy conversations with government advisers revealed a 
wish to move slowly on deciding or implementing global reforms.  In 
a meeting on November 6 with ECouns, Ministry of Finance (MoF) Chief 
Economic Adviser Arvind Virmani relayed some of his concerns and 
considerations for dealing with the global financial crisis.  (Note: 
The GOI initially named Virmani to attend the summit as Finance 
Minister Chidambaram's deputy, so that Finance Secretary Ashok 
Chawla could stay back to monitor the domestic situation.  End 
note.)  He admitted he was concerned about the general spillover 
effects of financial integration, pointing to the bank events in 
Ireland and Iceland.  He characterized the Iceland banks' situation 
as one where foreign banks in Iceland looked to shore up their 
bottom line in their home countries, adversely impacting Iceland. 
What, Virmani hypothesized, if something similar were to happen in 
an India that liberalized and allowed more foreign banks in? In such 
a situation, Virmani thought, it would appear that during a crisis 
like now, foreign banks in India would look to home country concerns 
and make India vulnerable.  However, rather than concluding that a 
closed financial system was the answer, Virmani suggested that the 
lesson from those developments was to create consensus on global 
governance rules relating to foreign banks in domestic financial 
systems. 
 
¶5. (SBU) Virmani was hesitant, however, about starting work to 
change the current global financial architecture.  He thought that 
central bank coordination on interest rates was itself a step 
towards revising the global architecture whose time was not yet 
right. (Note: The Prime Minister told reporters in Oman on November 
9 that India is coordinating policy action with other countries and 
Russian FM Kudrin announced at the G-20 Ministerial last weekend 
plans to coordinate with India, Brazil and China to boost trade and 
capital flows. End note).  Virmani bluntly observed that it is a 
difficult time to defend markets when markets are not working. 
However, he still supports liberalization, but feels the best 
confidence-building measures are the steps that each government is 
taking individually.  Although Virmani did not think the time was 
yet right for concrete action (specifically noting that G-20 leaders 
will want to factor in President-Elect Obama's views on the crisis), 
he thought India should be open and receptive at the Summit and 
wanted India to be a part of any working group that was formed. 
 
¶6.  (SBU) MoF Joint Secretary (Securities Markets) KP Krishnan, a 
senior and influential joint secretary at the Ministry, also seems 
to be advising caution on concrete action.  When asked at a finance 
conference on November 6 about how the MOF was considering reforms 
in light of the crisis, Krishnan stated that the Ministry had so far 
been doing "fire-fighting" for the short term, and had only had the 
most preliminary conversations about the medium and long term 
implications from the crisis.  In his view, he continued, there is a 
general tendency to draw lessons too early in the aftermath of a 
crisis, which leads to the wrong lessons.  His inclination, Krishnan 
explained, was to wait until the fires were put out, before deciding 
what were the causes and the necessary reforms to avoid a 
recurrence. (Note: This go-slow orientation was also observed by 
Japan's Special Envoy to the G-20 Summit, Toyoo Gyoten, who told 
Ambassador Mulford November 11 that he perceived India would want to 
move slowly and take a wait-and-see approach to global change.  End 
 
NEW DELHI 00002909  003 OF 004 
 
 
note.) 
 
¶7.  (SBU) ICRA Chief Economist Saumitra Chaudhury, member of the 
Prime Minister's Economic Advisory Council, told Econoff that his 
input into the GOI's decision-making on the summit was not to expect 
anything concrete out of the Summit and to stay out of any sparring 
between the US and Europe.  In any future discussions about new 
architecture, Chaudhury had suggested the creation of a new IMF 
lending facility for developing countries, funded by the developed 
economies, since they were the cause of the problem.  Such a new 
facility should prioritize infrastructure financing, to help 
countries (presumably India included) facilitate further economic 
growth. 
 
Overall Commitment to Reforms 
----------------------------- 
 
¶8.  (SBU) For India, however, Virmani surmised that India would 
continue with its reforms.  Not only that, Virmani thought that 
India should accelerate proposed reforms in light of the financial 
crisis.  This view was echoed by Krishnan, who commented that even 
in the wake of current financial crisis, it was clear that India 
needs to continue reforms towards efficient financial intermediation 
to help facilitate growth.  Krishnan noted that this basic need was 
part of a recent "vision statement" drafted by his office prior to 
the financial crisis, but even more needed in light of the last two 
months.  He further observed that he did not see that a large 
economy like India had much choice in financial integration with the 
world, asserting that India had received clear gains from 
integration with the world economy since 1991. 
 
¶9.  (SBU) KM Abraham, a full-time member of India's Securities and 
Exchange Board of India (SEBI), speaking at the same conference at 
Krishnan on November 6, noted that D. Subbarao, the head of India's 
central bank, the Reserve Bank of India, had stated that greater 
coordination among central banks would be helpful, especially with 
Asian neighbors.  Echoing that, Abraham stated that the crisis is 
helping India's regulators to collaborate with counterparts in other 
countries.  Abraham also approvingly quoted European Central Bank 
President Trichet as calling for supervisory cooperation and 
information sharing. 
 
¶10.  (SBU) Meanwhile, the recent appointment of Raghuram Rajan, 
former chief economist at the IMF and professor at the University of 
Chicago, as economic advisor to the Prime Minister, is a major 
signal that Prime Minister Singh remains committed to financial 
sector reform in India.  Rajan was the lead author of a committee 
report to the Government of India in April 2008 identifying key 
reforms and liberalization in India's financial system in order to 
support growth and financial inclusion.  His report called for a new 
paradigm in the financial sector where the government leaves some 
critical roles to the private sector, but creates an enabling 
environment that contains both liberalization and effective 
regulation.  Although the report called for a new paradigm, its 
title "A Hundred Small Steps" and contents recommend an incremental 
approach to reform, rather than a drastic overhaul.  Rajan's 
approach may play a defining role in the global reforms that India 
 
NEW DELHI 00002909  004 OF 004 
 
 
supports or promotes in the existing financial architecture.  With 
Rajan's background at the IMF, his financial expertise, and his 
clear support by the PM, he is a natural choice to be India's 
representative in future deliberations on global architectural 
reform. 
 
Comment 
------- 
 
¶11.  (SBU) The Prime Minister has emerged as the defining figure in 
determining India's role in the G-20 Summit and what global next 
steps should be taken. At the same time,  the voices whispering in 
the PM's ear seem to be advocating a go-slow approach to calls for 
systemic change in the global system.  India has advocated for 
increased voting rights at the IMF and World Bank in light of its 
increasingly large economy, but whether it is prepared to advocate 
for this or any other specific changes at the Summit is not clear. 
A go-slow approach will allow India to listen and deliberate over 
suggested reforms.  It may not yet know what it wants to change, but 
India definitely wants to be part of such a process.  Reinforcing 
this deliberate stance is the fact that this is India's first global 
financial crisis; its economy and financial system were previously 
too closed to feel much impact. 
 
¶12.  (SBU) On specifics, the Indian delegation may argue that 
developing countries should not shoulder any burden of fixing the 
current situation, such as proposed schemes to fund new lending 
facilities at the IMF or World Bank.  Not only is this consistent 
with historical Indian positions of developing versus developed 
countries, but the idea of India contributing money to a global fund 
during its current election year would probably not be supported by 
Congress Party President Sonia Gandhi.  The IMF's suggestion that 
all countries should consider a stimulus package may not be 
supported by India unless it is exempted. It is already facing a 
doubling of its fiscal deficit this year, partially because of 
populist, expansionary spending started in March this year.  It 
could very well argue that it is already implementing a stimulus 
program, through recent government pay raises, rural employment 
guarantee program, farm debt waiver program and an increase in 
income tax thresholds. 
 
MULFORD