Advanced economies should calibrate stimulus exit: PM

Written by KG Narendranath | Toronto | Updated: Jun 28 2010, 05:31am hrs
Prime Minister Manmohan Singh on Sunday made a strong pitch for calibrated as opposed to quick exit from fiscal stimulus by those advanced countries who can afford it. He also tacitly told China to rebalance its exporst-led growth strategy, which is at odds with the global efforts for balanced and sustainable economic recovery.

Addressing the G20 summit here, Singh warned that simultaneous withdrawal of fiscal stimuli by many countries could provoke a double-dip recession, which could have very negative effects on developing countries. As the global recovery is still fragile due toslack private demand in the developed world, primacy should be given at this juncture to consolidating the recovery, Singh asserted.

He acknowledged that Euro zone countries with exceptional fiscal stress must give high priority to taking contractionary measures which the financial markets are looking for, but advised other advanced countries to opt for a much more calibrated exit from their expansionary fiscal stance.We should adopt a carefully differentiated approach, reflecting the circumstances of individual countries, he said. There are uncertainties and it was difficult to strike a right balance, he said, adding that, on the whole, the risks of destabilising the recovery was too great. We face a much grater risk of deflation that inflation, Singh said.

The PMs comment comes at a time when the governments of G20 countries, unable to resolve their differences over the manner and timing of winding down the stimuli unveiled since the April 2009 London summit of the forum, appeared to devise disparate strategies to sustain the fledgling global economic rebound. Singhs speech has, nevertheless, reinforced the USs position that it was too early to withdraw stimuli and that developing countries should find the sources of growth primarily from domestic demand, by allowing more flexibility in their exchange rates.

Singh admitted that aiming at higher levels of investment despite lower export growth could generate larger current account deficits, but added that by this strategy the developing countries would help rebalance global demand. He said this strategy however required a situation where higher current account deficits of developing countries can be financed, through an expansion of multilateral and private capital flows.Despite the sharp fall in exports in exports in 13 months up to November 2009 when the downturn bottomed out and the decline in net invisible receipts, Indias balance of payments position is hardly precarious. Despite the global crisis, large inflows of equity and debt capital had bolstered the countrys BoP position. In fact, Indias foreign exchange reserves rose by $9.5 billion in April-September 2009. The capital account had a surplus of $48.5 billion in 2009-10.

The BRIC countries also have a similar view, especially in regard to the timing of the stimulus rollback, although it is unclearhow amenable China is to thecall to reduce its dependence on exports for growth. Singhs statement that developing countries need to rebalance their growth strategies is in conformity with Indias own focus on using private investment in infrastructure to compensate for the slackness in the export demand. It also signals an accommodation of the advanced countries interests in this regard.The US and Canada have re-affirmed their willingness to continue stimuli for another year to reinforce the global recovery. While the US has said that the commitment to reducing long-term deficits should not be at the cost of short-term growth that the world very clearly needs now, Canada has stood firm on its March 2001 stimulus funding deadline. The US has a high fiscal deficit of about 10% of its gross domestic product at present. The Obama Administration aims to halve it by 2013, a plan that doesnt necessitate quick withdrawal of higher spending or tax cuts.

However, Germany, the only country in the Euro zone which has the capacity to maintain an expansionary fiscal stance, feels it had done its bit to spur global growth, and is disinclined to do more for the South European countries that are in a sovereign debt trap. The UK and Japan too have lately said they would now want a shift towards austerity.

While Germanys fiscal position is relatively strong, the US doesnt have to worry much about its transient high debt-to-GDP ratio thanks to its greater prospects of growth in the near term, and the situation of dollar being the global reserve currency. In his speech, Singh also assured the G-20 the forum of developed andemerging economiesfor coordinated macro-economic policy-making-thatIndia wouldreformits domestic financial sector in line with international consensus.However, this key agendaitem before the G-20is most likely to be deferred to the forum's Seoul summit in November.

The PM underscored the need to firmly resist the protectionist tendencies of developed countries, and added that successful completion of Doha Round talks for trade liberalization was imperative. Speaking of Indias growth projections, Singh said the economy was expected to grow by 8.5% in 2010-1 and go back to 9% expansion by 2011-12, a rate achieved in the four years before the global economic downturn. On the fiscal front, he said that the country was taking steps to reverse the fiscal stimulus in line with the medium term plan to halve the fiscal deficit by 2013-14. India has budgeted to reduce the fiscal deficit to 5.5% of GDP this fiscal, a plan it could even excel, due to the windfall revenue from auction of third generation airwaves and the growth-induced buoyancy in tax revenue.