Shed protectionist tendencies, RBI Governor tells West

WASHINGTON, APRIL 23. To sustain the recovery process and to correct the global imbalances in an orderly fashion, a coordinated and cooperative approach is needed and the key elements of this should include different policy responses in different countries and regions, says the Governor of the Reserve Bank of India, Y.V. Reddy.

In his statement to the International Monetary and Financial Committee, IMFC, Dr. Reddy said that while there was a need in the United States to curb household and government borrowing and strengthen national savings, policies would need to "delicately balance a gradual withdrawal of fiscal stimulus without hurting the recovery and at the same time without disruptive adjustment of the U.S. dollar."

Dr. Reddy stressed the need for "bold leadership" in resolving some of the issues confronting the international community where in spite of the past crisis exposing various deficiencies of the international financial system, the progress towards developing a sound system had been slow.

"Accumulation of foreign exchange reserves by several Asian countries seems to be not only linked to the exchange rate policies and the related trade as well as employment implications but also to the lack of confidence of these countries in the existing architecture," the RBI Governor maintained.

Dr. Reddy also called on the developed nations to shed their protectionist tendencies particularly in the sectors of agriculture and textiles and especially in the context of the developing countries getting out of their protectionist mindsets. "Developing countries are increasingly realising that trade is, after all, not a zero sum game but a win-win proposition for both trading partners," he said.

Turning to countries in his constituency — Bangladesh, Bhutan, India and Sri Lanka — Dr. Reddy said performance had been a matter of "satisfaction." For instance, the Indian economy had moved to a high growth path; GDP growth was expected to be over 8 per cent in 2003-04 and agricultural growth expected to be over 10 per cent and the industrial sector continuing to remain buoyant. The RBI Governor took the position that corporate restructuring and further opening up of the external sector have started to yield dividends; infrastructure had been given renewed priority; growth of exports had been robust and the health of the financial sector had also been improving.

"The main challenge of macro-economic management today continues to be fiscal consolidation. However, there are definitive signs of progress towards deficit reduction," Dr. Reddy observed.

On Official Development Assistance (ODA), Dr. Reddy noted that developed countries were falling short of the committed target of 0.7 per cent of their gross national product and that a large part of the actual increase had not been directed to finance the Millennium Development Goals but enlarging the scope of debt forgiveness or aiding the war on terror, "crowding out" development aid. "There is also no clear picture emerging that donors have moved towards targeting aid better for countries with better policies and institutions, and away from imposing excessive transaction costs on recipients, thereby impairing efficiency," the RBI Governor said.

Dr. Reddy, among his various other references to the functioning and strengthening of the international financial system, reiterated India's vehement opposition to all forms of terrorism and its commitment to fight against the abuses of the financial system that would include money laundering and terrorism financing.

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