Warning that the financial meltdown has exploded into a systemic crisis, Prime Minister Manmohan Singh on Saturday asked world leaders to work on a coordinated fiscal package to tackle recession that is hitting India and other developing countries.
"India is experiencing this negative impact... emerging market countries were not the cause of this crisis but they are among the worst affected victims," Singh said addressing the G-20 Summit, convened by US President George W Bush.
Attributing the crisis to failure of regulatory and supervisory mechanism, Singh said, "We must give the world a clear signal to take specific coordinated action to handle the crisis in a manner which restores confidence and which also responds to the needs of the developing countries."
He said a credible system of multilateral surveillance which can signal the emergence of imbalances, should be designed to protect the world from recurrence of such crisis and suggested a multi-pronged approach to spur investment, global trade and capital flows to re-instill investors' confidence.
Advocating a coordinated fiscal stimulus to help mitigate severity and duration of the recession, Singh pressed for urgent steps to strengthen the global trading system and forestall any protectionist tendencies which surface during such crisis.
Singh, 76, an eminent economist himself, prescribed a slew of measures, including short-term swap arrangements, special incentives to counter shrinkage of capital inflows and activating a process of replenishing IMF resources.
"Resorting 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," he told the Summit which has leaders from the UK, France, China, Japan Italy and other leading nations.
The Summit deliberated on short-term, medium and long-term steps to overcome the financial crisis.
The prime minister said the industrialised countries could help revive trade flows in developing nations by expanding the scale of export credit finance available to them.
"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," he said.
Projecting a lower economic growth of 7-7.5 per cent in the current financial year, Singh said, "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."
He said slowing down of growth in developing countries would push millions of people back into poverty, with adverse effects on nutrition, health and education levels.
"These are not transient impact but will impact a full generation. If we are to prevent a slide back and ensure that Millennium Development Goals are to be achieved, we need to ensure that growth in developing economies is not affected," he said.
He emphasised that the leaders of 20 leading nations need to distinguish between the immediate and medium term priorities. The need of the hour must be to bring the crisis under control as quickly as possible with as little adverse effect on developing countries, while the medium term aim is reforming the global financial architecture to prevent similar crisis in the future.
Although a series of steps have already been taken by countries to inject liquidity into the system and recapitalise banks, crises are far from over as the credit channels remain clogged and the signs of distress in the real economy suggest that additional measures are needed, Singh added.
Asking the international community to consider special incentives to counter the shrinkage of capital flows to developing countries, that is almost certain to occur over the next two years, Singh said the 'initiative by the IMF to establish a new liquidity facility is 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," he said, adding, "we must activate a process for replenishing IMF resources."
An alternative to the IMF as source of quick disbursing liquidity is the establishment of short-term swap arrangements. "Countries in a position to do so should consider the scope for expanding such arrangements," he added.
To ensure that such crisis do not occur in the future, Singh said, "We also have 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."
