Stating that the International Monetary Fund had failed in its role to provide early warning of any impending financial disaster, Finance Minister P Chidambaram said on Thursday that there was a pressing need to have an effective global surveillance mechanism to avoid such future shocks.
The finance minister was speaking to the media aboard the Prime Minister's special aircraft on way to Washington to attend the G20 Summit.
Reiterating Prime Minister Manmohan Singh's views, the finance minister said that India's views at the G20 Summit will mainly focus on three issues:
"The key point is, we must agree to a new order of global oversight. And this can come only by, as the prime minister said, greater inclusivity in the international financial system.
"In many ways, the IMF (inclusivity) and the G-7 is too narrow and too small. A more inclusive system can provide better surveillance and serve as an early warning mechanism," he said.
While the world grapples with the crisis, the countries most hit by the crisis find their growth prospects hampered, said the finance minister.
"We must not forget that there are only a handful of economies that are driving the world economic growth. Among them are the China and India and a few other countries. There are some others who have the ability to become the drivers of economic growth.
"So it is very important that these few countries should not suffer in the period during which we grapple with the economy crisis. Resources must be made available to developing countries, including India, so that they can continue to grow and try to
have economic development."
"The crisis," he said, "should not be an excuse to go into a protectionist cocoon. That would be the worst way to solve the crisis. We must now try to encourage free flow of goods and services and must continue to enhance the flow of capital, excepting for increasing free flow of goods, services and capital, there is no way in which the world will recover and get back to the growth path.
"So that is why the prime minister emphasises that this is not the time to adopt protectionist policies. This would require deep thought and deliberation and quick agreement among the leaders."
Chidambaram said that domestic regulation in the present context is a function "which national regulators will loath to give up. That is why regulation must be national. If we can agree upon common prudential and regulatory standards, and then ask national regulators to apply those standards, there can be some kind of a global oversight, where the national regulators are doing their job.
"I don't think regulation can be raised to a global regulator. That's too ambitious, and perhaps not possible in today's circumstances."
Answering a question on whether he was talking of a new mechanism for fund flows, the finance minister said: "That depends upon where the resources would be found. If the resources can be found and channelised through the existing multinational institutions, if you find resources that cannot be channelised through the multinational institutions then we have to find another mechanism through which these resources can be channelised to the developing countries."
He said that economies like India will also be impacted by the contagion that emanated in the United States and Europe, but such economies should not suffer because of the excesses of the West and more resources should be made available to these nations to tide over the current financial crisis.
He said that the financial crisis should not be an excuse to go into a protectionist cocoon. There should be freer flow of goods and services, and a freer flow of capital should be encouraged.
Chidambaram proposed a multi-pronged strategy to tackle the issue:
With the IMF unable to provide an early warning and the G7 too narrow and unrepresentative, the world needed to move to a new order of global monitoring mechanism, he added.
While dismissing the suggestion that a new Bretton Woods institution could be born out of the current crisis, the finance minister said that there was a need to improve global multilateral institutions.
"It is clear that if there had been an effective surveillance mechanism, it could or should have identified the huge risks that were being taken by some international financial entities. In the absence of this surveillance mechanism, these financial entities, some of which have collapsed, took unacceptable risk.
"That was what led to the crisis in the United States. So what we will talk about in
Washington is if we can agree upon such global oversight mechanism, I'm not sure what shape it will take. But we need to talk about it," the finance minister said.
He said if the World Bank would extend more funds to India, it would gladly accept the. He also mentioned that given the current scenario, tightening of purse strings by the World Bank could hit Indian states' projects.
The finance minister said that the absence of US President-elect Barack Obama at the G20 Summit might not impact the summit called by President George W Bush.
He said that deliberations on tackling the financial crisis facing the world will go well beyond January 20, 2009 (when Obama will take office) or May 22, 2009 (when India goes to polls).
"So I don't think we are going to take an election constricted point of view. We have to take a medium to long term point of view, and I believe the US also will take that view.
"After all, President Bush and President-elect Obama are reported to have talked about these issues at great lengths only two days ago. So I think Obama's inputs will be there in whatever President Bush presents. So we will have to take a view that takes us well beyond those election dates. That is the stance that I think India will adopt."