Two topics dominated the agenda of the recently concluded G-20 meeting in Toronto. The more publicised one concerned fiscal policies of nations. Specifically, should countries which in earlier summits had voted for pumping in money and loosening monetary policies — the stimulus packages — now change course sharply?

Second, since the giant banks and the financial sector of the developed world were responsible for the recent global crisis, what steps should be taken to rein them in? The G-20 countries were expected to agree on a core set of rules and regulations that would apply to the financial sector at the global level but would be implemented by individual nations.

Changed thinking

The Toronto summit had a divisive agenda especially with regard to fiscal policy. Previous summits had emphasised unity among nations. Economic policies, both fiscal and monetary, were to be co-ordinated to combat the crisis. With a waning crisis, the sense of urgency to coordinate fiscal policies was simply not there. On the contrary, the very efficacy of a policy of incurring fiscal deficits to stimulate domestic demand has come to be questioned.

For more than a year now, the G-20 rather than the G-8 has taken on the mantle of coordinating economic policies worldwide. Since the first set of synchronised expansionary policies were framed and agreed upon, the world has changed. Not only has there been a recovery of sorts but individual countries face new economic challenges, some of which have no direct connection with the global crisis.

Notably, some European nations — Greece, Spain, Portugal and a few others — are paying for past profligacy as reflected in a high level of public indebtedness. Obviously not all the money these countries borrowed went to stimulate their economies to combat the crisis.

Go by to stimulus

In any case, fears of sovereign default grew and many countries, besides Greece, where the problems first surfaced, reacted by embarking upon — not always voluntarily — tough austerity measures. The question of persisting with stimulus measures, if any, did not arise for them.

The sovereign debt crisis called into question the viability of the welfare state model so deeply entrenched in the psyche of European nations since the Second World War. In relation to the economic crisis, however, it resurrected fears of another financial sector breakdown on a global scale. Many banks from the West have invested in the sovereign bonds of Greece and other countries perceived to be vulnerable. A default by any one of these could therefore trigger another financial sector crisis on a global scale.

There were, of course, other economically stronger countries that wanted the stimulus to be phased out. Germany, for instance, has for long been a champion of fiscal rectitude. The German Chancellor has been in the forefront of those who want an early phasing out of stimulus. On the other side were the U.S. and other countries which want the stimulus to continue for some more time.

India's balanced stand

India's position was balanced and nuanced. As clarified by Prime Minister Manmohan Singh, given the uncertain world economic outlook, striking the right balance between persisting with and phasing out the stimulus packages was not easy. But he would prefer to err on the side of continuing the stimulus packages as the risks of destabilising the recovery were “too great”. In any case, deflation was a bigger risk than inflation. That last message was addressed to the developed countries, especially Japan.

In India, however, it is inflation that has become the biggest worry. The government has already begun a retreat from the fiscal stimulus while the Reserve Bank of India is expected to tighten monetary policy even more in direct response to the inflation. But there is a fear that demand contraction in advanced economies will impact adversely exports.

In the end the leaders of the world's biggest economies agreed on a time-table for cutting deficits and halving their debt levels in a time bound programme but also acknowledged the need to move carefully so that reductions in spending did not set back the fragile global recovery. The declaration at the end of the summit therefore had something for all. Each side could claim victory. The public message from all countries was that there was agreement on principles — that they should move towards fiscal consolidation — but the pace of implementation would depend on each country's circumstance.

On the second area of reform — the global financial sector — it was clear that all the new rules and regulations developed at the instance of the G-20 countries would be made applicable only after some time.