India's growth to be hit, PM suggests measures to tackle crisis

By Gurdip Singh

Washington, Nov 15 (UNI) Saying that the growth of the Indian economy is expected to slow down to between 7 and 7.5 per cent this fiscal due to the global financial crisis, Prime Minister Manmohan Singh today made a host of suggestions to prevent such
a crisis in future and protect developing countries from the present turmoil, including the World Bank Group and Regional Development Banks providing an additional 50 billion dollars per year to support infrastructure projects in developing countries.

''This window (for infrastructure projects) can be wound down once normalcy returns to global capital flows,'' Dr Singh said in his address to the Summit of the Heads of Governments of the G-20 countries.

The theme of the Summit is ''Financial Markets and the World Economy.''

The other suggestions made by the Prime Minister in this regard are reforming the global financial architecture to prevent similar crisis in future, governments of industrialised counties intervening to ensure that private flows to developing countries are not affected, replenishing the resources of the IMF, governance reforms of the Fund, developed counties providing expanded export credit on reasonable terms to poor countries and ensuring that the Doha Round is completed.

Dr Singh mooted the idea of short-term swap arrangements as an alternative to the IMF as a source of quick disbursing liquidity. The existence of such arrangements will reduce the burden on the IMF and will add to confidence in the system, he said.
''Countries in a position to do so should consider the scope for expanding such arrangements,'' he said.

Dr Singh said new and innovative ways are needed for solving the financing problems that will restrain infrastructure investment.
''The World Bank, regional development banks and national governments need to consider measures such as providing additional credit for infrastructure projects, promote new instruments for infrastructure financing and providing capital and liquidity support to banking institutions to lend to infrastructure projects that are underway. The World Bank, IFC and the Regional Development banks should aim at making an additional 50 billion dollars per year in support of infrastructure development in the public and private sectors. This window can be wound down once normalcy returns to global capital flows,'' he said.

He said industrialised countries are expected to slow down in 2008.

They are now projected to be in a recession in the second half of the year, and there is little prospect of an early recovery.
''Many have called it the most serious crisis since the Great Depression,'' he said.

The Prime Minister said India is experiencing the negative impact of the crisis. After growing at close to nine per cent a year for four years, its growth rate is expected to slow down to between seven per cent to 7.5 per cent in the current financial year.

''The pace of growth next year will depend, in part, upon how long the global recession lasts and how quickly global capital flows return to normal. Much of India's growth is internally driven and I expect we can maintain a strong pace of growth in the coming years, but many developing countries will be hit harder,'' he said.

The Prime Minister said slowing down of growth in developing countries will push millions of people back into poverty, with adverse effects on nutrition, health and education levels.
''These are not transient impacts but will impact a full generation. If we are to prevent a slide back and ensure that Millennium Development Goals are achieved, we need to ensure that growth in developing economies is not affected,'' he said.

Dr Singh said since the crisis was global, it calls for a coordinated global response. He said the measures taken by governments in this regard have had some effect, but the crisis
is ''far from over''.

''Credit channels remain clogged and the signs of distress in the real economy suggest that additional measures are needed,'' he said.

The Prime Minister said a coordinated fiscal stimulus by countries that are in a position to do so would help to mitigate the severity and duration of the 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 we are indeed on the brink of the worst downturn since the Great Depression, the risk may be worth taking. We should therefore take all possible measures at the national level to complement any coordinated international stimulus,'' he said.

The Prime Minister said the initiative by the IMF to establish a new liquidity facility was a welcome step. ''However, we must also consider whether the IMF is adequately funded for the task it will face in managing this global crisis. Looking ahead we must plan for possible additional demands on the IMF if the global recession is pronounced. This suggests that we must activate a process for replenishing IMF resources.''

Dr Singh said industrialised countries can also help to revive trade flows in developing countries by expanding the scale of export credit finance available to these countries.
''We know there is a temporary market failure in this area with elevated risk perceptions which discourage private flows. There is a need to intervene to overcome market failure. A collapse of trade is the last thing that one wants in the current crisis, with all its implications for growth and employment. Concerted government action in expanding export credit financing on reasonable terms will help support the pace of development in developing countries, which is critical for achieving poverty alleviation and employment
objectives,'' he said.

He called for urgent steps to strengthen the global trading system and forest all any protectionist tendencies which surface in times of recession.
''A successful conclusion of the on-going multilateral trade talks would be an important confidence builder at this stage. We are willing to work constructively with other major players to reach a balanced and mutually beneficial outcome,'' he said.
''The new architecture we design must include a credible system of multilateral surveillance, which can signal the emergence of imbalances that are likely to have systemic effects, and also put in motion a process of consultation that can yield results in terms of policy coordination,'' he said.

The Prime Minister said over the years, the IMF has become marginal to the task of policy analysis and consultations on macro-economic imbalances and related policies in the major countries.

''That task is now performed in other forums, though it is questionable whether it is being performed well. I believe we need a comprehensive review of the procedures of the IMF, leading to recommendations on governance reform that would enable the Fund to perform the role of macro-economic policy coordination,'' he said.

Dr Singh said an important element of longer term reform is to restructure the representation in the governance levels of the Fund to reflect the current and prospective economic realities.

''Quota reform is the normal way to effect a change in voting power, but it has been contentious and incremental, and what has been achieved thus far has fallen far short of what is needed. The Board of Governors of the IMF should be explicitly charged with exploring alternative modalities to achieve a more legitimate representation,'' he said.
The Prime Minister said it was necessary to pay attention to the many regulatory gaps in the financial system which allowed the development of excess leverage and the risks associated with it.
''It is obvious that we need better systems of risk management and better regulation and supervision, especially of institutions that have a global reach and are dealing in financial instruments that are exceedingly complex. Managers of financial institutions, credit rating agencies and regulators have to do a much better job. The structure of incentives in the system has to be aligned to this end. We also need to examine whether the existing forums of regulators that are there are adequate and cover the entire gamut of regulatory and supervisory activities that are required, ''he said.
He said the specialised forums dealing with financial stability, notably the Basel Committee on Banking Supervision and the Financial Stability Forum need to have broader representation than they do at present.
Dr singh said the convening of the Summit has raised expectations in many circles that ''we will work to produce a new Bretton Woods II''.
''The world has certainly changed sufficiently to need a new architecture, but this can only be done on the basis of much greater preparation and consultation. We can, however, signal that we are serious about starting a process that will, in time, produce an
architecture suited to the new challenges and vulnerabilities facing the world economy and reflective of the changes that have taken place in the economic structure,'' he said.