'We Can Maintain A Strong Pace Of Growth'

PM’s statement at the Summit of Heads of State or Governments of theG-20 countries on Financial Markets and the World Economy. November 15,2008, Washington


We are meeting at a time of exceptional difficulty for the world economy. Thefinancial crisis, which a year ago seemed to be localized in one part of thefinancial system in the US, has exploded into a systemic crisis, spreadingthrough the highly interconnected financial markets of industrialized countries,and has had its effects on other markets also.

It has choked normal credit channels, triggered a worldwide collapse in stockmarkets around the world. The real economy is clearly affected. Industrialisedcountries were expected to slow down in 2008. They are now projected to be in arecession in the second half of the year, and there is as yet little prospect ofan early recovery. Many have called it the most serious crisis since the GreatDepression.

Emerging market countries were not the cause of this crisis, but they areamongst its worst affected victims. Recession will hit the export performance ofdeveloping countries and the choking of credit, combined with elevated riskperception, will lead to lower capital flows and reduced levels of foreigndirect investment. The combined effect will be to slow down economic growth indeveloping countries.

India is experiencing this negative impact. After growing at close to 9% peryear for four years, our growth rate is expected to slow down to between 7 to7.5% in the current financial year. The pace of growth next year will depend, inpart, upon how long the global recession lasts and how quickly global capitalflows return to normal. Much of India’s growth is internally driven and Iexpect we can maintain a strong pace of growth in the coming years, but manydeveloping countries will be harder hit.

A slowing down of growth in developing countries will push millions of peopleback into poverty, with adverse effects on nutrition, health and educationlevels. These are not transient impacts but will impact a full generation. If weare to prevent a slide back and ensure that MDGs are achieved, we need to ensurethat growth in developing economies is not affected.

Since the crisis is global, it calls for a coordinated global response and thissummit is therefore timely. In our discussions, we need to distinguish betweenthe immediate priority, which must be to bring the crisis under control asquickly as possible with as little adverse effect on developing countries, andthe medium term objective of reforming the global financial architecture toprevent similar crises in future. I will comment briefly on both.

As far as the immediate priority is concerned, I recognize that a number ofimportant steps have already been taken by countries to inject liquidity intothe financial system, recapitalize banks and other systemically importantinstitutions. Some countries have also introduced a number of innovative, evenunorthodox, measures to restore confidence so that the financial system couldstart functioning again. These measures have had some effect, but the crisis isfar from over. Credit channels remain clogged and the signs of distress in thereal economy suggest that additional measures are needed.

An obvious issue is to consider whether the emergence of recessionary trendscalls for some fiscal stimulus. A coordinated fiscal stimulus by countries thatare in a position to do so would help to mitigate the severity and duration ofthe recession. It would also send a strong signal to investors around the world.Resort to fiscal stimulus may be viewed as risky in some situations, but if weare indeed on the brink of the worst downturn since the Great Depression, therisk may be worth taking. We should therefore take all possible measures at thenational level to complement any coordinated international stimulus.

The international community needs to consider special initiatives to counter theshrinkage of capital flows to developing countries that is almost certain tooccur over the next two years. The initiative by the IMF to establish a newliquidity facility is a welcome step. However, we must also consider whether theIMF is adequately funded for the task it will face in managing this globalcrisis. Looking ahead we must plan for possible additional demands on the IMF ifthe global recession is pronounced. This suggests that we must activate aprocess for replenishing IMF resources.

An alternative to the IMF as a source of quick disbursing liquidity is theestablishment of short term swap arrangements. The existence of sucharrangements will reduce the burden on the IMF and will add to confidence in thesystem. Countries in a position to do so should consider the scope for expandingsuch arrangements.

Depressed conditions in the global economy are likely to produce a downturn inprivate investment in developing countries which will worsen recessionarytrends. It is necessary to take steps to counter this development. Expandinginvestment in infrastructure by the public sector and also the private sectorwhere possible is an ideal countercyclical device. It has the immediate effectof stimulating demand counter-cyclically and the longer-term effect of layingthe conditions for an early return to faster growth. Investment ininfrastructure today is perhaps the best signal for reviving private investment,including FDI, tomorrow.

This requires new and innovative ways of solving the financing problems thatwill restrain infrastructure investment. The World Bank, regional developmentbanks and national governments need to consider measures such as providingadditional credit for infrastructure projects, promote new instruments forinfrastructure financing and providing capital and liquidity support to bankinginstitutions to lend to infrastructure projects that are underway. The WorldBank / IFC and the Regional Development banks should aim at making an additional$50 billion per year in support of infrastructure development in the public andprivate sectors. This window can be wound down once normalcy returns to globalcapital flows.

Industrialized countries can also help to revive trade flows in developingcountries by expanding the scale of export credit finance available to thesecountries. We know there is a temporary market failure in this area withelevated risk perceptions which discourage private flows. There is a need tointervene to overcome market failure. A collapse of trade is the last thing thatone wants in the current crisis, with all its implications for growth andemployment. Concerted government action in expanding export credit financing onreasonable terms will help support the pace of development in developingcountries, which is critical for achieving poverty alleviation and employmentobjectives.

Our willingness to take specific steps to support developing countries in thisperiod of exceptional difficulty will be a test of our collective leadership.Many developing countries have made strenuous efforts to implement economicreforms to deal with the challenges of an increasingly open and globalisedworld. This has often required implementation of policies which have arouseddomestic fears and uncertainties. We have persevered in this process and havebenefited from it. Economic performance in almost all developing countries hasimproved. In the process, attitudes towards globalization have begun to changeand people all over the world have come to appreciate the enormous benefits thatcan be derived from global economic integration. It would be a great pity ifthis growing support for open policies in the developing world is weakenedbecause of a failure to protect developing countries from a recession which isnot of their making.

We need to take urgent steps to strengthen the global trading system andforestall any protectionist tendencies which always surface in times ofrecession. A successful conclusion of the on-going multilateral trade talkswould be an important confidence builder at this stage. We are willing to workconstructively with other major players to reach a balanced and mutuallybeneficial outcome.

While our immediate priority should be to deal with the crisis which is stillunfolding, we also need to look ahead to see what changes are needed in theglobal financial architecture to avoid such crisis from recurring. Much usefulwork in this area has already been done by Finance Ministers and there isconsiderable consensus on many areas. I will, therefore, limit my remarks to afew points.

I agree with the general consensus that there are several factors behind thecrisis and the future global economic architecture must be designed to deal withthese. These include failure of regulatory and supervisory mechanisms,inadequate appreciation and management of systemic risks and inadequatetransparency in financial institutions.

The new architecture we design must include a credible system of multilateralsurveillance which can signal the emergence of imbalances that are likely tohave systemic effects, and also put in motion a process of consultation that canyield results in terms of policy coordination. At this point, I would like toemphasise the importance of broad based multilateral approaches to our efforts.Bodies such as the G-7 are no longer sufficient to meet the demands of the day.We need to ensure that any new architecture we design is genuinely multilateralwith adequate representation from countries reflecting changes in economicrealities.

The International Monetary Fund is the logical body to perform the task ofmultilateral surveillance of macro-economic imbalances and their relationship tofinancial stability. However, it is relevant to ask whether its systems andprocedures are adequate to the task. Over the years, the Fund has becomemarginal to the task of policy analysis and consultations on macro-economicimbalances and related policies in the major countries. That task is nowperformed in other forums, though it is questionable whether it is beingperformed well. I believe we need a comprehensive review of the procedures ofthe IMF leading to recommendations on governance reform which would enable theFund to perform the role of macro-economic policy coordination.

An important element of longer term reform is to restructure the representationin the governance levels of the Fund to reflect the current and prospectiveeconomic realities. Quota reform is the normal way to effect a change in votingpower but it has been contentious and incremental, and what has been achievedthus far has fallen far short of what is needed. The Board of Governors of theIMF should be explicitly charged with exploring alternative modalities toachieve a more legitimate representation.

Looking ahead, we also have to pay attention to the many regulatory gaps in thefinancial system which allowed the development of excess leverage and the risksassociated with it. It is obvious that we need better systems of risk managementand better regulation and supervision, especially of institutions that have aglobal reach and are dealing in financial instruments that are exceedinglycomplex. Managers of financial institutions, credit rating agencies andregulators have to do a much better job. The structure of incentives in thesystem has to be aligned to this end. We also need to examine whether theexisting forums of regulators that are there are adequate and cover the entiregamut of regulatory and supervisory activities that are required.

These are technical issues that should be tackled in the specialized forumsdealing with financial stability, notably the Basle Committee on BankingSupervision and the Financial Stability Forum. However, both these bodies needto have broader representation than they do at present. Internationalco-ordination on regulatory issues would be more easily achieved if theprincipal forums where these issues are discussed were seen to be morerepresentative. Broad basing the present representation in these forums is mucheasier to achieve and I hope this Summit will give a clear signal in thisdirection. It will certainly build confidence in our intention over the longerterm to achieve significant reform in the governance of the global financialsystem.

Given the fact that this financial crisis has affected growth prospects acrossthe board, we also need to examine the present structures of trade anddevelopment finance to consider how to ensure greater stability in these flowsin the face of difficult situations such as the current one. This issue could beexamined by the expert group I have referred to or by separate group focusing onthis issue. Its work could lead to the design of appropriate internationalmechanisms and instruments for maintaining and enhancing these flows in future.

The convening of this Summit has raised expectations in many circles that wewill work to produce a new Bretton Woods II. The world has certainly changedsufficiently to need a new architecture, but this can only be done on the basisof much greater preparation and consultation. We can however signal that we areserious about starting a process that will, in time, produce an architecturesuited to the new challenges and vulnerabilities facing the world economy andreflective of the changes that have taken place in the economic structure. Wemust also give the world a clear signal of our resolve to take specificcoordinated action to handle the current crisis in a manner which restoresconfidence and which also responds to the needs of developing countries. We needto ensure that the processes we set in motion today safeguard and promote thewelfare of our future generations.