PM warns simultaneous contractionary policies could provoke double dip recession

Prime Minister Manmohan Singh attending the Opening Plenary Session of the G-20 Summit, in Toronto, Canada on June 27, 2010.

Prime Minister Manmohan Singh today said the global economic recovery was still fragile and contractionary policies, if followed by many industrialised countries simultaneously, could provoke a double dip recession.

"This would have very negative effects on developing countries, and on the prospects for achieving the Millennium Development Goals," Dr Singh said at the G20 Summit in Toronto today.

He said the central problem the world faced today was how to ensure and protect global growth in a situation where amrkets had become very nervous about debt sustainability, especially in some countries in the Eurozone.

"I recognize that there are uncertainties and it is difficult to strike the right balance. But on the whole, I feel the risks of destabilizing the recovery are too great. We have a much greater risk of deflation than inflation. We must, therefore, give primacy to consolidating the recovery, while also taking measured steps to deal with sovereign debt problems," he said.

The Prime Minister said this called for careful coordination of policies among the G20 countries. He pointed out that it was precisely for this purpose that the member-countries had agreed at the last summit in Pittsburgh to work on a Framework to deliver strong and sustainable growth.

"The outcome of Phase I of this process, which is now before us, sheds valuable light on the policy responses needed in different groups of countries," he said.

Dr Singh said fiscal consolidation must, obviously, have high priority in those advanced deficit countries that are experiencing exceptional fiscal stress and where markets had signaled serius concern. However, other advanced countries should opt for a much more calibrated exit from stimulus, he said.

"We should adopt a carefully differentiated approach, reflecting the circumstances of individual countries," he said.

He said the time phasing of fiscal action was also important. He said markets might well be reassured by credible steps by major industrialised countries, which impact the fiscal deficit significantly over time, even if the immediate impact is more limited, he said.

Dr Singh said developing countries needed to rebalance their strategies to rely less upon exports and more on domestic demand. In many developing countries, this is best done through increased investment directed to infrastructure. This will sustain growth in the short run by offsetting the contractionary effect of lower exports. It will also increase growth potential in the medium term, by addressing the supply side constraints, he said.

He said aiming at higher levels of investment despite lower export growth was likely to generate larger current account deficits. This will help rebalance global demand, but it requires an environment in which the higher current account deficits of developing countries can be financed. This requires an expansion in both multilateral and private capital flows, he said.

"Growth in developing countries would be greatly helped if threats of new protectionist measures in industrialized countries are firmly resisted and existing barriers to trade, especially those affecting developing countries, are reduced. In this context, a successful completion of the Doha Development Round is imperative," he stressed.

The Prime Minister also briefly spoke about India was handling the situation. He said that, thanks to an effective fiscal and monetary stimulus, the country was able to contain the effect of the global crisis on its economy. After growing at 9 percent for four years before the crisis, India's economy averaged about 7 percent growth in the last two years. It expected to grow by 8.5 percent in 2010-11 and hoped to go back to 9 percent by 2011-12.

"This is an ambitious goal and we recognize that we have much to do to achieve it. We are taking steps to reverse the fiscal stimulus we had introduced to deal with the crisis. To this end we have outlined a medium term plan to halve the fiscal deficit by 2013-14.

"We are giving a strong push to investment in infrastructure, relying on private public partnership as much as possible to reduce the burden on scarce public resources.

"We have a sound and well regulated financial sector which was not affected by the crisis. We will persevere with implementing financial sector reforms to support rapid and inclusive growth in the real economy, and also to increase systemic stability in the financial sector," he added.

NNN