At G20, PM warns against withdrawal of stimulus packages
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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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