In his opening address to the G-20 meeting here on Thursday, Prime Minister Manmohan Singh questioned the received wisdom that a flexible exchange rate was a self-correcting mechanism in all situations, and called for “efforts at restoring growth, which will be greatly helped if we have a stable external environment. The G-20 has a major role to play in this context.”

Dr. Singh called upon the G-20 leaders to send a clear signal of “our collective commitment to work together for the revival of growth, which is the only way of ensuring a sustainable growth in quality jobs.”

He argued that any recovery in the global economy could not be driven by the developed economies alone. There was “need to restore robust growth in the emerging market countries, which will also contribute to global recovery.”

Putting the past five years of global economic turmoil in perspective, he said: “Faced with persistent demand deficiency, industrialised countries relied heavily on unconventional monetary expansion on an unprecedented scale. This did not emerge from the agreed policy coordination process. It emerged from internal decision-making processes in the individual countries, reacting to their respective economic outcomes.”

This is significant because the Prime Minister has categorically stated that the excessively loose monetary policy adopted by the United States was not part of the G-20-agreed framework after the 2008 crisis. This was driven purely by the specific need of the developed economies to deal with their deepening domestic crisis of unemployment.

This position taken by India has got validated by the BRICS leaders on the sidelines of the G-20 meeting. The G-20 had talked about coordination of fiscal policies by all nations but there was no formal agreement on how monetary policies could be calibrated by the developed and developing nations after the 2008 crisis. It is this weakness of the G-20 framework which is being sought to be addressed now.

Dr. Singh said: “The policy of unconventional monetary expansion in advanced countries had some success but it also had spillover effects. When policy was being loosened, there was a surge in capital flows to emerging markets, which helped some countries finance their current account deficits while generating upward pressure on the currencies of other countries.”

But “with markets now anticipating a reversal, we are seeing a large outward flow from emerging markets. Since most emerging markets now operate with flexible exchange rates, they have experienced varying degrees of currency depreciation, posing problems in many cases.”

Significantly, the Prime Minister said: “The conventional view that capital volatility should not be a source of concern as long as exchange rates were flexible is now being questioned. Sudden increases in cross-border flows affect not only the exchange rate but also credit volumes and asset prices.”

This effectively amounts to saying that automatic adjustment of capital flows and growth does not take place with a flexible currency all the time. In effect, the Prime Minister has questioned the orthodoxy of self-correcting market forces in today’s global conditions.

Dr. Singh will meet his Japanese counterpart on Friday and announce the operationalisation of the $ 15 billion currency swap which will further fortify India’s external sector. India will use the Japanese swap arrangement as a signal to the market in addition to the BRICS currency reserve fund

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