The global economy is unlikely to slip into a recession but there is a need for coordinated policy action across countries, said Christine Lagarde, who was appointed managing director of the International Monetary Fund for a second term last month after an uncontested election. In an email interview ahead of the Advancing Asia conference in New Delhi, Lagarde said that although India will not remain insulated from global developments, it is protected by its strong current account position. But weakened corporate and bank balance sheets pose a significant domestic risk to the Indian economy, she said. Lagarde stressed the need for labour market reforms, early implementation of the goods and services tax (GST) and introducing the bankruptcy code to strengthen the Indian economy. Edited excerpts:

Christine Lagarde, chief of the International Monetary Fund. Photo: Bloomberg
Christine Lagarde, chief of the International Monetary Fund. Photo: Bloomberg

Q: What will be your priorities in your second term as IMF chief?

A: I have been honoured to serve for the past five years, and I am delighted to be appointed for a second term. I greatly appreciate and hope to live up to the confidence and trust that the IMF’s membership has expressed through this selection. Now, going forward, our priorities are to focus on the short-term needs of our members while also being mindful of the medium- and long-term challenges, opportunities and potential risks on the horizon. We can do a lot in terms of support, lending, and programs, but I would like us to delve more into prevention—more into anticipating changes. As the economic advisor to 188 countries, the IMF has a unique overview of all its members’ economic policies and their effects – within and across national borders. It is very important that we share this cross-country knowledge; that we transmit all the information we have about what worked and what did not, or how we expect economic policies in one country to affect another country’s economy. When I speak with policymakers, this is often one of the first questions they ask me, and I see placing greater emphasis on our cross-country advice in the coming years.

Of course, hearing from the membership is critical to being able to provide this kind of advice. My visit to India will give me an excellent opportunity to listen to and learn from policymakers and other experts from India and throughout the region.

Q: What is the probability of the global economy falling into a recession as some analysts are apprehending? What are the risks to watch out for? How different will it be compared with the 2008 financial crisis?

A: We do not foresee a recession for the global economy. The world’s financial sector is far more resilient today than in 2008, and financial institutions around the world are a lot stronger. But we are in a moment where coordination is needed. If there is one thing we have clearly identified in the last few years, it is the importance of spillovers and spillbacks—how monetary policy decided in one country can have repercussions in others. A large enough and more coherent global financial safety net will be particularly important as risks continue to rise with further financial integration.

The IMF will continue to work to bring global policymakers together in cooperative fashion to shed light on economic challenges, lift confidence, and bolster the world economy.

Q: You have termed the Indian economy a bright spot in the past. For how long can India remain insulated from the growing turmoil in the global economy?

A: It is true that outside India we have seen increased global financial volatility. India will not be immune from that, but we think with its improved current account position and healthy FDI (foreign direct investment) flows, its large stockpile of reserves will smooth the way through the volatility. Continuing labour and product market reforms can also lock in strong growth, help reduce poverty, and bolster macroeconomic stability. India has been one of the fastest growing major economies thanks to smart policy actions together with the decline in oil prices. We forecast growth of about 7.3% for this fiscal year, rising a little to 7.5% in the next fiscal year.

Q: Prime Minister Narendra Modi will be completing two years in office soon. What is your assessment of the reform measures implemented by the government? What are the other structural problems the government needs to address to boost economic growth?

A: I would like to compliment the government for taking some very beneficial measures for the economy, such as introducing inflation targeting, reforming subsidies so that they support those who need them the most, and enhancing the business environment.

The number one policy that we would like the government to implement is to introduce the goods and services tax. The GST will not so much be a revenue-raiser but will lower trade barriers across the 29 states of India and give a boost to growth as well.

We would also like the government to tackle labour market regulation reform, as well as addressing agricultural reforms, particularly in the storage, handling, and distribution of food, which will also help keep food inflation down. This is a key issue for India where food accounts for almost half of household expenses.

Q: What is your assessment of the risks to the Indian financial sector? Indian banks are facing huge levels of bad debt that are impacting their profitability and corporate entities are highly leveraged.

A: We see weakened corporate and bank balance sheets as a significant domestic risk to growth in India. We have noted the recent uptick in non-performing assets, particularly those at public sector banks. That said, the magnitude of non-performing assets is, in our assessment, moderate and, even in an extreme stress scenario, increasing capital buffers in public sector banks should be a manageable task. The Reserve Bank of India is aware of the issue and has taken steps toward more stringent recognition and more effective resolution of distressed bank loans, and has raised banks’ provisioning for bad loans. Implementing governance reforms in public sector banks, along with the introduction of the new bankruptcy law, are needed to ensure the durability of India’s strong growth.

Q: The Indian financial sector has seen a lot of disruption in the past couple of years such as the introduction of a new class of payments banks. How do you see the Indian financial sector growing? Is this the beginning of a new phase?

A: Indeed, many positive actions are being taken in the financial sector. I am especially pleased to see that financial inclusion is a key national priority in India and remarkable progress has been made toward universal access to basic banking. In less than two years, over 210 million people have gained access to financial services through the Pradhan Mantri Jan Dhan Yojana scheme, and the range of these services is expanding. This is facilitated by new technologies and is backed by India’s unique biometric identification system (Aadhaar), so India’s social protection programs can also better serve the poor.

With the Indradhanush plan, the government has laid out a plan for revamping public sector banks, making them more efficient. Further steps are also being taken to promote competition in the banking sector.

Q: While the 2010 governance reforms have now been implemented, through which developing countries including India have received higher quota in the Fund, when is the next round of quota reforms likely to start? Will it address the more fundamental issue of the way the formula is arrived at, as raised by India?

A: In December we completed historic reforms that will significantly increase the IMF’s core resources and also better reflect in the IMF’s governance structure the increasing global role of dynamic emerging and developing countries.

Under these reforms, for the first time, four emerging market countries—including India—are now among the IMF’s 10 largest members (the other three are Brazil, China and Russia). The reforms also increase the IMF’s financial strength, bringing our permanent capital to $660 billion.

As for the formula that determines every country’s quota in the institution, the members will discuss it during the upcoming general review. Our aim is to complete the review by the Annual Meetings of October 2017.