At G20, PM warns against withdrawal of stimulus packages

Last Updated: Saturday, September 26, 2009 - 09:00

Pittsburgh: Prime Minister Manmohan Singh
on Friday warned against "premature" withdrawal of the stimulus
package for revival of the global economy hit by worst crisis
since the Great Depression and to resist the temptation to
resort to protectionist pressures.

"First, the problem must be tackled at its root by
ensuring the quickest possible return to normalcy in the
global economy. This requires a commitment that we will not
undertake any premature withdrawal of stimulus," he said,
addressing the G-20 Summit here hosted by US President Barack
Obama.
"We must certainly plan for an orderly exit when the
time is right, but that time is not now. The global economy
may be bottoming out, but it is not expected to reach 3 percent growth until the end of 2010," he said.

In the address at the Summit attended by world leaders
belonging to the developed countries and major emerging
economies, Singh made a strong pitch for a restoring the
momentum of growth in the developing world and said there was
need to replace lost export demand and to expand investment.

Singh expressed confidence that despite a drought that
will effect agricultural production, India expects to grow by
6.3 percent in 2009-2010 and then recover to 7 to 7.5 percent
growth next year.

After growing at 9 percent per year for four years
the economy slowed down to 6.7 percent in 2008-09.

"The prospects of convergence, which seemed bright
before the crisis, have receded. We must take steps to counter
these developments and restore the momentum of growth in the
developing world," the Prime Minister said.

Facing the crisis, the G-20 Summit in London in April
had decided to pump in USD 1.1 trillion to resurrect the
economy from the worst downturn since the depression of the
1930s and there have been voices from the European powers
seeking exit from continuing with the stimulus in view of
inflation fears.

Cautioning against protectionism in world trade, Singh
said the collapse in export markets makes it all the more
important that the market access of developing countries is
not constrained by protectionism.

"I recognise that when growth is low, and unemployment
is high, it is inevitable that protectionist pressures will
arise. It will be a test of the collective political
leadership of this Group, whether we are able to resist these
pressures in our countries.

"I am happy to note that the Delhi Ministerial
succeeded in reviving momentum for the Doha Round
negotiations. I venture to suggest that this is an area where
the industrial countries can give a lead to achieve a
successful outcome," he said.

Singh said the leading economies have done a great
deal on finance and what remains is easily doable. "We need to
address the difficult tasks on the trade front which are now
more important for the medium term," he said.

Singh said the developing countries were in no way
responsible for the crisis but in many ways they are the
hardest hit.

In the seven years before the crisis, the GDP of the
developing countries grew at an average of 6.5 percent per
year and in 2009 it will grow by only 1.5 percent, implying a
fall in real per capita income.

India too, he said, has been affected, but in common
with other Asian countries it has weathered the crisis
relatively well given the circumstances.

This relatively strong performance is partly due to
the strong stimulus measures introduced in the second half of
2008-09, which have been continued in the current financial
year.

However, he said, the fact that some of the countries
have relatively faired well does not mean that the crisis has
not affected the developing world significantly. The fact that
the growth of developing countries as a group will fall to 1.5
percent indicates the extent of the impact.

Singh said an estimated 90 million people in the world
are likely to be pushed below the poverty line. Lower revenues
will also lead to lower levels of expenditure on rural
infrastructure, health and education.

This will not only hurt future growth, but also delay
achievement of the millennium development goals, he said.

Social and political tensions could arise undermining
the national consensus in support of the much-needed
structural reforms and adjustments.

"The prospects of convergence, which seemed bright
before the crisis, have receded. We must take steps to counter
these developments and restore the momentum of growth in the
developing world," the Prime Minister said.

Giving an overview of the global economy, he said that
its depressed state translates into a considerable loss of
export demand for the developing countries. Exports of non-oil
developing countries are expected to decline by about USD 900
billion in 2009, compared to the previous year.

"They will remain well below the trajectory earlier
projected for several years. This is bound to reduce
production, incomes and employment in the developing
countries," Singh said.

He said the measures taken by the G20 to increase the
flow of assistance will help and they certainly represent an
important achievement in international cooperation.

"However, the scale of the transfers we have planned
will only help the developing countries to manage their
balance of payments at depressed levels of economic activity.
They cannot counter the effect of the loss of exports," Singh
said.

The Prime Minister said to resuscitate growth in the
developing countries, the lost export demand should be
replaced by expanding other components of domestic demand.
"The best option is to expand investment. An obvious
area where additional investment is needed in developing
countries is infrastructure, including energy, transport and
other infrastructure for public services.

"These investments can be made ahead of requirements
and therefore are an ideal form of countercyclical activity,"
he said.

Singh said the World Bank and the other regional
development banks can play a major role by financing such
investment.

They should expand lending for infrastructure
development to emerging market countries which have relied on
capital markets in more normal times, but will need support in
the medium run, till capital markets recover. The poorer, low-
income countries had very little access to capital markets.

"For them, financing on suitable terms may have to be
made available for an even longer period," he said.

Singh favoured a strategy of expanding investment
demand in developing countries to replace lost export demand,
which would not only help growth in developing countries but
also contribute to a broader global revival.

This is because the import content of investment is
typically higher than of exports which mean a significant
percentage of the initial increase in demand will spill over
into the global economy.

Referring to the World Bank announcement of increasing
the volume of its lending to USD 100 billion over the next
three years, the Prime Minister said this is commendable.

"However, if the capital base of the World Bank is not
expanded, they will have to compress lending at the end of the
three year period to less than the pre-crisis level. This is
surely not acceptable," he said.

There was therefore, Singh said, an overwhelming case
for doubling the capital of the World Bank. Similar increases
in capital were also needed for the other regional development
banks.

Singh said, he recognised that there may be hesitation
in committing additional public resources for
recapitalisation.

"However, we must keep in mind that what is needed for
these institutions is small compared to the massive scale of
public money used to stabilise the private financial system in
industrialised countries.

"Some additional effort is surely justified to help
the developing countries to cope with the spillover effects of
a crisis for which they were not responsible," Singh said.

Bureau Report



First Published: Saturday, September 26, 2009 - 09:00

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