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Sridhar Krishnaswami

Mr P. Chidambaram

Washington , April 16

THE current phase of global economic expansion has been aided by "benign" inflation levels in most of the nations, especially the industrialised ones, but there are strong downside risks as a result of hardening oil prices, strengthening of global non-oil commodity prices and difficulties in monetary management being faced by emerging market economies in coping with large inflows of foreign exchange reserves, says the Finance Minister, Mr P. Chidambaram.

In his statement to the International Monetary and Financial Committee here, the Finance Minister and leader of the Indian delegation has pointed out that fiscal deficit and public debt of many industrialised nations have not only continued to be high but have also gone up in some instances.

"Progress in fiscal consolidation during 2004 was scant. What is worrying is that consolidation prospects for 2005 also do not appear encouraging," Mr Chidambaram has said also making the point in the process that in spite of well laid out medium-term fiscal reforms in the US, the euro area and Japan there are concerns if these can be implemented by overcoming various socio-political and economic constraints.

The Finance Minister has argued that the outlook for global growth in 2005 remains above the trend level at 4.3 per cent and that the robust outlook has been shaped by strong corporate performance, accommodative macro-economic policies and favourable financial market conditions in various regions of the world; but the apparently strong outlook "conceals the emergence of sharp imbalances and other risks".

Mr Chidambaram has pointed out that there are several downside risks that could temper the optimism of sustained global growth and these would include exchange rate volatility and further rise in commodity and oil prices.

"The persistence of high oil prices pose a risk to growth in major oil importing economies like the US, China and India. As a developing country, I must voice my profound disappointment that the oil producing countries and other developed countries show little concern for the burden that high oil prices put on our development efforts," the Minister stressed.

Touching on the theme of importance of worker's remittances as stable external flows in reducing poverty in many low income developing countries, he said that efforts to improve the convenience and efficiency of the banking systems and policy measures to encourage non-banking financial intermediaries such as money changers and exchange bureaus should continue. But there was a word of caution as well in directly linking worker's remittances with anti-money laundering/ combating financing of terrorism as the latter has a much broader dimension, including the organised financial system.

Talking of the developments in his constituency, Mr Chidambaram said the Indian Budget envisages achieving and maintaining an annual growth rate of between seven per cent and eight per cent and among other things accelerating fiscal consolidation and ensuring higher financial devolution.

"Maintaining price stability is an important policy priority in India. Both monetary and fiscal policies have given considerable attention to price stability and inflation expectations as part of growth oriented strategy," the Minister said.

The Finance Minister pointed out that the institutional arrangements for decision making of the Fund still remain "heavily weighted" in favour of the developed countries. "The international community must pay attention to the hard reality that the arrangements evolving in the financial architecture cannot operate successfully without equal partnership between developed and developing countries or between economies with surplus capital and capital shortages," he said going on to stress that reducing this "democracy deficit" in the functioning of the Fund must be approached structurally and through the redistribution of voting power among member nations.

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`Growth optimism tempered by downside risks'

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