FINANCIAL SCENE
Huge problems but subdued expectations
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India’s viewpoint, articulated by the Finance Minister on the eve of the meeting, encompassed three inter-related areas
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It is just as well that there were no exaggerated expectations from the global summit. Its most favourable outcome came weeks earlier when China, India and others were invited to decide on a new economic order.
The biggest gain from the G-20 meeting held in Washington on November 15 might have accrued several weeks earlier. The American President’s invitation to 20 rich and emerging countries was a recognition, though belated, of the fact that many more countries besides the group of seven countries (G-7) need to be involved in any discussion on the global economy.
A cozy club of seven rich countries cannot be allowed to run the global economy. Even in more normal times, say, before August 2007 when the housing led crisis hit the rich countries, this was not possible. The ongoing economic crisis has removed any lingering doubts. The crisis might have originated in the U.S. housing sector. Till date, it might have affected the western economies much more. But India, China and other developing economies are part of the solutions and without involving them no world order or, for that matter, even a near term plan to mitigate the crisis is possible.
For India, China and a few other countries, which are not part of the G-7, recognition might have come late but they have a tremendous task ahead in projecting their viewpoints in whatever new forum that are created after Saturday’s meeting.
India’s stand
India’s viewpoint, articulated by the Finance Minister on the eve of the meeting, encompassed three interrelated areas. One, greater inclusivity in the global financial system so that global oversight over the financial sector improves. Financial conglomerates operating in many countries have resorted to “regulatory arbitrage,” among other sharp practices, in many cases. A proposal for a “college of supervisors” was gaining ground on the eve of the summit. It is, however, just one of the steps contemplated.
Greater inclusivity also means that India, China and others should have a greater say in the working of institutions such as the International Monetary Fund — a point made much before the financial sector crisis. Almost certainly the roles of the IMF and the World Bank will now come under greater scrutiny.
Contagion spreads
Two, growth prospects of developing countries should not be hampered. China and India are expected to grow at a slower pace but will continue to be at the top of the global growth table. Given the interconnectedness of the financial market, the contagion from the West has already visited India. Not just the precipitous decline in stock markets, but the ever increasing signs of a slowdown have been a major cause for concern. The global financial sector crisis has resulted in a freezing of the credit markets. Capital expenditure programmes of even top rated companies have been affected.
Three, the need to avoid protectionism. As the developed countries slip into a deep and prolonged recession, a surge in the latent protectionism is seen. If unchecked, this will have a range of adverse consequences. For instance, it will herald bad times for India’s top exchange earning IT/BPO companies. Any remaining chance of the Doha round of trade talks reviving will vanish.
On the Summit’s eve, most countries were warming up to the idea of fiscal stimulus packages as a way of reviving their economies. China has already announced a $600 billion package. The beneficial effects of such packages will be magnified if nations announce the fiscal measures in a co-ordinated fashion.
Muted expectations
By its very nature a global conference engaged in fixing major economies and rewriting the rules for the financial sector that has spun out of control cannot achieve much. Besides, the political transition in the U.S. will undoubtedly keep the lid on expectations. But the mere decision to convene a meeting of a much more representative body of nations is a welcome first step, paving the way for more elaborate discussions in the coming months if not weeks.
Multilateralism so well advocated in international trade should obviously form part of the global economic order.
World economy according to IMF: A kind of background paper to the summit was released by the IMF on November 6. Important points from its World Economic Outlook Update are:
(1) World economic growth is forecast to come down by 1.5 percentage points to 2.2 per cent in 2009.
(2) Advanced economies — the U.S., Euro zone and Japan — will contract by 0.3 per cent next year. (3) Emerging market and developing economies are projected to grow by 6.6 per cent during 2008 but will slow down to 5.1 per cent next year. India is forecast to grow by 6.3 per cent in 2009, a long way below the 7.8 per cent during 2008. China will grow by 9.7 per cent and 8.5 per cent in 2008 and 2009, respectively.
(4) Policies to stimulate growth will help in cushioning the slowdown.
C.R.L. NARASIMHAN
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