Prime Minister refers to an orderly exit from unconventional monetary policies in the backdrop of splits between emerging markets and the U.S. and the slowing growth of India.
Prime Minister Manmohan Singh on Wednesday indicated some of the pressing issues that India and other emerging economies might raise at the 8th G-20 summit beginning Thursday at St. Petersburg.
At the very outset, Dr. Singh emphasised that the G-20 summit was taking place against the backdrop of persisting challenges and vulnerabilities in the global economy and particularly noted that emerging economies are facing the adverse impact of significant capital outflows.
He was obviously hinting at the manner in which currencies of emerging economies witnessed dramatic depreciation ranging between 14 and 20 % in the past few months. This new emerging vulnerability will be top-of-the-mind issue at the G-20 summit, though the formal agenda set out under the Russian Presidency includes broader themes such as reviving global growth in an inclusive manner to ensure better quality employment, financial regulation and infrastructure development in the developed and developing world.
The shared vulnerability among the emerging economies of the G-20 group is expected to create a special sense of solidarity, especially among the BRIC countries, over the next two days. It is expected that China, India, Brazil and Russia will have a very meaningful meeting on the sidelines to take forward some concrete ideas relating to financial cooperation to create confidence in each others’ currencies in these trying times. In this context, the $100-billion currency swap arrangement proposed by the BRICS economies at their summit in Durban earlier this year assumes great significance.
In a statement just an hour before boarding the special aircraft for St Petersburg, Dr. Singh identified the core question that India might flag at the summit — “the need for an orderly exit from the unconventional monetary policies being pursued by the developed world for the last few years, so as to avoid damaging the growth prospects of the developing world.” Indeed, the Prime Minister has been very direct in stating that the United States has a certain obligation to help minimise risk to global growth by effecting an orderly exit from its “unconventional monetary policy.”
It will be interesting to see how the United States responds to this collective concern of the emerging economies within the G-20 whose economies are very vulnerable on the external account at present. Sources said the developed economies are expected to respond with their own wish list that emerging economies must fulfil in terms of much more structural reforms.
The United States Federal reserve has been hinting since mid May this year that it may have to gradually withdraw over the next year its $85 billion-a-month support to the domestic housing sector and the rest of the economy. India will seek some clarity on how the U.S. will go about doing this.
In a separate briefing on board the aircraft, Arvind Mayaram, Secretary Economic Affairs, said the government would seek some predictability of the withdrawal of the unconventional monetary policy in the West. He said it was now globally accepted that the huge rush of liquidity these past many years and its sudden withdrawal now had created problems for the emerging economies.
“Won’t cross the red line”
Asked whether India had done enough in terms of domestic policy reforms to minimise the impact of such contagion in the emerging markets, he said the Finance Minister has drawn red lines for fiscal deficit and current account deficit for the coming year which “we will not cross.” Responding the rating agency Standard and Poor’s assessment that there is a 33 per cent chance that India might be downgraded in three years, Mr. Mayaram made light of it saying “why is it not 32% instead of 33%? How has the rating agency arrived at such figures?
Mr. Mayaram also said India would aggressively raise the issue of attempts by some developed countries to roll back access to trade and services which are hitherto available. In particular, he hinted that the United States’ tendency to raise fresh barriers in their immigration policy was a matter of concern. Some of these issues might come up in the talks aimed at furthering the trade agenda at the WTO later this year.