Cannes: As Eurozone crisis threatened to engulf global economy, Prime Minister Manmohan Singh on Thursday warned that "prolonged" uncertainty and instability in Europe will hurt other countries too and suggested that the IMF can help rescue the situation. (Agencies)
Observing that everyone has a stake in the orderly functioning and prosperity of Europe, including the Eurozone countries, Singh told the G-20 Summit, the International Monetary Fund (IMF) must keep the situation under "close watch" as part of regional surveillance and should also be willing to help in an appropriate manner if asked to do so.
"Prolonged uncertainty and instability in the Eurozone countries can hurt us all. In an increasingly integrated world, all of us have a stake in the orderly functioning and prosperity of Europe," he said in his intervention at the Summit of the world's 20 leading economies at this French Riveria resort.
The sixth Summit in three years is meant to focus on reforms of the global monetary system and steps to rein in speculative capital flows, but has been overshadowed by the fresh Greek crisis amid talk of the possibility of a Greek pullout from the 12-year-old common currency Euro that could have contagion effect.
Singh said the announcement of a referendum by the Government of Greece has upset the "calculations" to put in place quickly the agreement arrived at by Eurozone leaders for reducing the Greek debt, combined with a new EU-IMF programme providing additional resources.
He hoped that ways can be found to manage the situation so that a package can be put in place as quickly as possible.
Noting that the G-20 was meeting at a time when the global economy faces exceptional uncertainty, Singh said the Summit will be judged by its ability to deal with financial instability emanating from the Eurozone periphery.
Asserting that India strongly supported the IMF playing its part in restoring stability in Europe, he said at the same time it must also keep in mind the liquidity requirements of developing countries who are not at the centre of the crisis, but may nevertheless be adversely affected as "innocent" bystanders.
Singh said the creation of a Eurozone has brought to the fore the need for addressing one of the known deficiencies in having a monetary union without fiscal union.
Welcoming the initiatives taken in the Eurozone to evolve innovative mechanisms to raise resources for the bailout fund -- European Financial Stability Facility (EFSF)-- and to strengthen fiscal discipline through intensive surveillance.
However, the effectiveness of these arrangements to cope with the crisis is yet to be tested, he said.
Singh said although the Eurozone countries have the principal responsibility for dealing with these problems, the dangers from spillovers from the Eurozone to the rest of the world are a matter of concern to all the countries.
The Prime Minister said while dealing with the short term problem of instability the G-20 must also face the challenge of orchestrating a broad based recovery and sustainable growth in industrialised countries and in developing countries.
"This is what the Mutual Assessment Process exercise is meant to do. We face the difficult task of balancing the requirement for giving a push to growth in the short term and the task of restoring fiscal sustainability over the medium term. These call for very different policy prescriptions," the Prime Minister said.
He said that Mutual Assessment Process needs to focus on structural reforms in all G-20 countries to increase efficiency and competitiveness over the medium term.
"This would help revive the animal spirit of investors which is necessary to allow us to shift the burden of sustaining demand from the public to private sector," he said.
"We in India are taking steps to ensure a return to high growth. Our economy has slowed down in the current year and GDP growth is likely to be between 7.6 and 8 per cent. Like many other emerging market countries, we too are experiencing high levels of inflation," Singh said.
"We hope to go back to higher growth in 2012-13, together with a moderation in inflation," the Prime Minister said.
Our medium term strategy focuses on a revival of investment especially in infrastructure, and continuing efforts to reduce our fiscal deficit through improved revenue collection which is expected to come from tax reforms, he said.
Singh told the Summit that as the G-20 battles with short term problems of crisis management it must not lose sight of the developmental needs of developing economies.
"After a long period, these economies experienced broad based acceleration of growth, making them potentially significant contributors to global growth. This is now threatened by slowing trend growth in developed countries and uncertainties in financial markets. We need to find credible ways of strengthening these growth impulses," he said.
The G-20 has made considerable progress towards strengthening global financial regulation and this needs to be carried forward through follow-up measures, Singh said.
It is important that in an integrated world there should be common standards that are implemented simultaneously in all jurisdictions, to avoid a race to the bottom, he said.
"In many developing countries, including India, financial markets have been tightly regulated. This tight regulation helped us avoid financial crises resulting from excessive leverage but it came with a cost, as it increased the cost of intermediation.
"Emerging markets therefore were engaged in progressive reduction in tight regulations with a view to modernizing their financial markets and expanding intermediation," he said.
Singh said the priorities in emerging markets, like India, before the crisis, were not regulatory but developmental, with the aim of deepening and developing new markets to sustain high rates of growth in the real economy.
Financial inclusion, provision of long-term funding instruments for infrastructure, the development of liquid bond markets to improve monetary policy transmission, among others, were financial sector priorities in India before the crisis, he said.
Nothing has happened in Indian financial markets or globally that warrants changing these priorities. We need to be sure that the regulatory reforms being introduced globally will not hamper this process, Singh added.
"There are areas where our concerns are different. For example, while banking capital needs to be strengthened in India, this is not on account of higher risks but because credit is projected to expand at a very fast pace to feed the high real growth that we expect," Singh said.
Citing another example, the Prime Minister said while the principle that the cost of a bailout falls on equity holders rather than on taxpayers is robust, in India large segments of the financial sector, especially banking and insurance, is mostly state owned, and equity holders and taxpayers are mostly one and the same.
"In this environment it is difficult to see why a financial sector tax, which would only raise the cost of capital even further, would be appropriate," he added.
Cannes: As Eurozone crisis threatened to engulf global economy, Prime Minister Manmohan Singh on Thursday warned that "prolonged" uncertainty and instability in Europe will hurt other countries too and suggested that the IMF can help rescue the situation.