As global headwinds continue to hit Indian and other markets, Finance Minister Arun Jaitley has asked advanced economies to be “mindful” of the spillover effect of their policies on the rest of the world.
He also asked the International Monetary Fund (IMF) to beef up its resources to ensure ‘future-proofing’ of the global economy against recurrence of financial crisis.
Speaking at the meeting of the International Monetary and Financial Committee (IMFC) Saturday night, Jaitley said India’s balanced macroeconomic environment and strong growth prospects make it a ‘bright’ spot in the global scenario.
Jaitley said the Indian economy has managed to put across a “credible” performance with an estimated growth rate of 7.6 per cent in the just concluded fiscal 2015-16, as against 7.2 per cent in the previous year.
“The growth performance is more credible given that it has been achieved despite contraction in our exports due to slowdown in global economy and two consecutive years of monsoon shortfall,” he said.
“However, there are concerns about export growth which is declining consecutively for more than a year due to slowdown in global demand,” Jaitley said.
The Finance Minister said subdued growth and low productivity in Advanced Economies (AEs) and elevated risks faced by Emerging Market Economies (EMEs), as also risks of instability of financial system, are hurting global recovery.
“Flagging trade volumes, softening commodity prices, idle capacities and anemic economic fundamentals, particularly in a number of large EMEs are increasingly impairing their ability to sustain economic and financial resilience against rising risk premiums and credit risks.
“Moreover, there are the risks of exogenous shocks from asynchronous normalisation of Unconventional Monetary Polices (UMPs) that can produce disorderly adjustments in exchange and volatile capital flows — increasing the cost of managing external exposures and balance of payments.
“In this milieu, risks faced, especially by crisis- affected countries and low-income countries, require the support of a credible multilateral safety net to provide financing necessary to prevent contagion.
“The IMF is in unique position to take this responsibility but needs to be strengthened further through reforms in its governance. At the same time, the IMF should also examine adequacy of its own resources and whether they are sufficient for ‘future proofing’ the global economy against recurrence of financial crisis,” he added.
Stating that UMPs have added huge uncertainty to financial markets and are harming the prospect of maintaining financial stability, Jaitley said, “Advanced economies should be mindful of the consequences of spillovers on other countries that are negatively affected”.
The Finance Minister said it is “a tall order” to expect a sustainable economic rebound, given the lack of policy space in major AEs and the existing vulnerabilities, especially, of commodity exporting emerging markets.
“Low and/or negative policy interest rates in many AEs have increased the risks of volatility in asset prices and capital flows, while increasing the propensity for competitive currency devaluations. UMPs targeted at reviving growth create disruptive spillovers given the growing inter-connectedness of the global financial system,” he said.
About India, Jaitley said the government is following the mantra of “Reform to Transform India” and has embarked on a path of far reaching structural reforms to foster strong and sustainable growth.
Jaitley, who is on a week-long visit to the US, said the Indian government is taking steps to reform institutions, simplify procedures, repeal obsolete laws and put in place a progressive and non-adversarial tax regime incorporating best global practices.
On IMF, Jaitley said it needs to maintain close oversight upon emerging vulnerabilities and remain committed to safeguarding the stability of the international monetary and financial system, given the wider implications of ongoing developments in the global economy.
“In order to be a reliable source of contingent financing, it is important to assess the sufficiency of Fund’s resources in accordance with the changing global realities including levels of global growth, size of trade and capital flows,” he added.
He also called for the completion of the IMF’s 15th General Review of Quotas by 2017, including the review of the new quota formula.
“The IMF can also serve as a platform for building consensual rules for enhanced cooperation among countries on matters pertaining to global stability.
“The leadership and participation of advanced economies, especially, the United States in the Fund is a valued source of its institutional strength and credibility. The Fund must continue to evolve as an effective institution in tune with changing character of the global economy, and build ample reserves to prevent the threat of financial distress among its members,” he added.
Separately addressing the Development Committee of the World Bank, Jaitley said India has created a favourable investment climate in all sectors which has resulted in a hefty increase in FDI in the last two years.
He said India has also made significant leaps in the developmental, climate change and inclusion agenda by launching path-breaking initiatives.
The Indian government, he said, is delivering subsidy to 153 million households for use of LPG directly in their bank accounts through the world’s largest cash transfer programme.
“The subsidies on petrol and diesel have been done away with and we have put carbon taxes on coal and other fossil fuels,” he said.
Jaitley said the global growth in 2015, currently estimated at 3.1 per cent, is projected to inch up to slightly higher level of 3.2 per cent in 2016 and 3.5 per cent in 2017.
“This slow and low growth faces significant downside risks — depressed commodity prices, ongoing geopolitical tensions in a number of regions and adverse financing conditions depressing investor confidence and global trade.
“Most worrying is the fact that the growth, which is necessary to achieve poverty reduction and SDGs, is now declining in emerging market and other developing economies and their fiscal position continue to deteriorate,” he said.
He also asked the World Bank to increase its developmental fund to USD 100 billion a year, from USD 50-60 billion at present, and called for enhancing the share and voice of developing nations in the management of institutions providing assistance under it.
The World Bank provides developmental assistance through International Bank for Reconstruction and Development (IBRD), the International Development Association (IDA) and the International Finance Corporation (IFC).
Observing that the World Bank is highly capital constrained, Jaitley said the IFC has no space to invest even at low level volumes it has been doing for some years.
IBRD would not be able to maintain lending levels of even USD 20 billion per annum in two years’ time, he said.
To better reflect the increasing weight of Developing and Transition Countries (DTCs), their share and voice in the management of these institutions also needs to grow, he said.
“We should therefore plan to have a Selective Capital Increase (SCI) to raise Developing and Transition Countries (DTCs) voting share to 50 per cent and a large general capital increase in IBRD and IFC for being able to finance USD 100 billion per annum going forward,” he said.