INTERVIEW - CHRISTINE LAGARDE

What strikes you about the 56 year old International Monetary Fund
managing director Christine Lagarde is her singular poise and bearing.
Speaking softly in her accented English, she will tell you that she
may be the first woman to helm the Fund, but what matters to her is
that she is not the last one. She displays complete candor when she
says, “I suppose it gives you added responsibility. And you have to
grit your teeth a little harder, because you want to demonstrate that
yes, we can do it and other women can do it after me. It’s demanding.
But it’s also a great challenge, a great task and a great job.” A
former synchronized swim champ who is keen on scuba diving and power
yoga, her athletic frame belies her age. After cutting her teeth as
chairperson of Chicago based law firm Baker & McKenzie, she is known
to be called an Americane, her powers of persuasion backed by a lack
of pretension make her a powerful negotiator in the world of high
street finance. In an extensive conversation with SANDEEP BAMZAI, she
reckons that capitalism will survive repeated stress tests that it is
being subjected to.



*You have been saying since late last year that the global economy has
entered a new "dangerous phase". On the face of it, markets seem to
have calmed down in the last couple of months and there has been some
movement from policy makers in Europe to ease the immediate crisis.
Are you any more comfortable with the global scenario today than you
were, say three months ago?
We are not out of the danger zone, but we have avoided the worst. Just
a few months ago, the recovery was in danger of being derailed. Things
have improved—Thanks to strong policy measures—in particular by the
ECB and European countries. Recent economic indicators suggest an
uptick in activity, mostly in the US. But let us not get ahead of
ourselves. Gains could easily be reversed. Major economic and
financial vulnerabilities remain. We need to use this breathing space
to build on what has been done.

*As far as Europe is concerned - a fresh rescue fund for Greece has
been put in place. However the rescue comes with such stringent
austerity conditions that it could push Greece into an even deeper
recession and perhaps even a deeper debt trap. Do you think the
measures being taken with regard to Greece can turn counterproductive?
The Greek government’s new program is explicitly designed to bring
forward Greece’s projected recovery. What are the overall objectives:
it’s growth, competitiveness obviously, and jobs, alongside
sustainable public finances and stable banks. What is crucial is to
increase employment. Unemployment remains high at 18% with youth
unemployment at almost 45%. Fiscal adjustment is essential but it
needs to be smart so it does not snuff out recovery and it must be
done in a way that is fair—for example the rich paying their taxes.
Still, we need to also recognize that the Greek economy is set to
contract further in the short run. The strategy aims at minimizing the
impact on the poorest and most vulnerable. A social spending review
will identify core social programs that should be strengthened to
better support individuals in need. Fiscal adjustment should be done
in a way that protects the poor and most vulnerable, and shares the
burden fairly across the population.

*Are elevated oil prices adding to the problems of the global economy?
And given that the reason for oil price spike seems to be tensions
with Iran - what is the IMF’s view?
The possibility of sharply higher oil prices, driven by
geopolitical-related supply concerns, is a certainly a key risk for
the global economy. The impact on oil prices would be quite large if a
potential or actual disruption in oil supplies involving Iran—the
world’s third largest exporter of crude oil—were not compensated by
increased supply by other oil producers. A halt of Iran’s exports to
OECD economies without offset from other sources would likely trigger
an initial oil price increase of around 20-30 percent, with other
producers or emergency stock releases likely providing some offset
over time.
The IMF is seeking more funds for itself ($500 billion) and s also
asking Europe to increase the size of its firewall. What is the
objective behind this? Are you fearing that other nations may need a
bailout?
The IMF is there to help all its members and we take this very
seriously. We estimate a global potential financing need of $1
trillion in coming years in an adverse scenario. To play its part, the
IMF would aim to raise up to $500 billion in additional lending
resources. Right now, we are consulting the membership. Our financing
is for all members, Euro area or otherwise. Boosting the Fund’s
lending capacity is about two things: Supplementing the resources
Europe will be putting on the table, but also to meet the needs of
“innocent bystanders” affected by contagion, anywhere in the world. A
global world needs global firewalls.
*You have asked other nations in the world including perhaps emerging
economies like China and India to lend more support towards Europe.
How successful has that pitch been?
We are discussing with all our members options for increasing Fund
resources. Emerging markets such as China and India are very important
members and part of these discussions. These resources would be to
help all our member countries, not just Europe.
Emerging market economies will play a bigger role going forward. This
is obvious, and cannot be ignored. Look at the IMF high table – for
the first time ever, there is a deputy managing director from China
and now the secretary of the our executive board is from China. The
proportion of Indian economists at the IMF is double of the Indian
quota. The human and managerial talent from emerging economies will
play a significant part. In fact, the head of the Asia and Pacific
Department at IMF is also an Indian. Asia’s share of capital and
voting rights is going up. The shift of power is taking place as I
look at the quotas. I think advanced economies need to learn from the
way India and China have handled the pressures lately.
*Are you disappointed with India’s economic performance? A lot is
being made domestically of the policy inaction that has pushed growth
rate and particularly investment rates lower…
Indian authorities have said on several occasions and in several
documents, India has the potential to grow at 9 percent, but reaching
those growth rates will require substantial reforms in several areas.
The 12th Plan Approach Paper has identified the right areas for
reforms. I agree that infrastructure especially power and investing in
education and health care, are key. Together with enhanced social
programs, raising agricultural productivity is also very important to
make growth more inclusive. We think also labour market and financial
reforms would boost growth and help create more formal sector jobs and
allow India to capitalize on its demographic dividend. India has
generally pursued a very inclusive reform process, seeking broad
consensus on reforms, which takes time to build, but usually pays off
by reducing the probability of backtracking.
*India seems to be stuck with a persistent problem of inflation. Even
today, after 13 interest rate hikes, we can’t say that inflation
concerns are over. Does that worry you?
The RBI has done the right thing by tightening monetary policy to
fight inflation and we support the resolve at combating inflation that
they have shown over the past couple of years. We also agree that
pausing is currently appropriate as growth has also slowed. Because
inflation has been elevated for some time, it may take some time to
bring it down to the historical averages prevailing in the mid-2000s.
Fiscal consolidation will also help reduce demand pressures. And
finally, easing some bottlenecks, for example in the food supply,
could help deal with the structural pressures on food prices that we
have seen in recent years. The 12th Plan is expected to deal with the
latter. So, the Indian authorities are rightly fighting inflation on
several fronts.

*What can the government do to revive growth and investment?

India is a supply-constrained economy. Bringing back high growth will
require removing those constraints. Reforms that can address this
include those needed to improve infrastructure (e.g. mining, land
acquisition, and energy pricing), the Goods and Services Tax, and
further advancing financial reforms (especially boosting the
development of the corporate bond market). Fiscal and financial
reforms should also be implemented to increase resiliency and make
growth more inclusive. More than anything else, addressing problems in
the power and coal sectors are the immediate priority given the
linkages across all sectors in the economy.
*How do you see the 2012/13 Budget?

I welcome the increase in capital spending and indirect taxes and
initiatives to improve spending efficiency—e.g. pilots on the use of
the Aadhaar (UID) to transfer LPG and kerosene subsidies directly. We
look forward to seeing the fruits of these changes in reorienting
spending from indiscriminatory fuel and fertilizer subsidies toward
capital and social spending, both needed to boost growth and make it
more inclusive. Consolidation remains crucial to rebuild space in case
the global situation should worsen, to reduce inflation pressures, and
to free savings to support growth.
*Is the consolidation in the 2012/13 Budget sufficient?
The important thing is to move India back toward a credible
medium-term path of fiscal consolidation. But delivering such targets
will be the real challenge. Actions taken to broaden the base of
services taxation and reverse excise rate cuts taken during the crisis
are important, and so are measures to reduce the subsidy burden. And
improved targeting may take some time to produce real savings in a
country as large as India. Keeping spending under control,
liberalizing diesel prices, and securing the passage of the DTC and
GST are crucial.
*What is the long-term prospect for India?
India is a bright star with many strengths that will serve it well,
including India’s great entrepreneurial spirit and talent. I welcome
the initiatives to scale up the use of the Aadhaar—India’s Unique
Identification system—which should ensure maximum impact of government
money on the lives of people who need it the most. India also has an
important role as an important voice to the world on behalf of
emerging and developing economies.
As I said earlier, reform is difficult in any country, and in a large
and heterogeneous place such as India achieving consensus can take a
long time. The Budget reiterated the government’s commitment to many
important reforms to taxation and the financial sector and the Fund
strongly supports those. We hope the government can build on those and
move forward with other structural reforms, such as to facilitate
infrastructure investment and liberalize the labor market.