G20 summit: PM makes case for going slow on stimulus withdrawal

**St Petersburg:**Fresh on the back of recent success in pushing through various laws in Parliament, Prime Minister Manmohan Singh today told world leaders that India will now push through with more “difficult” reforms in the days ahead, including relating to control of subsidies.

This remark, part of Singh’s detailed inaugural address at the Summit here today, is being read as a hint on further moves to control energy subsidies including the rising deficit on account of diesel prices. A decision, sources say, would be taken next week.

The PM also made it a point to tell Barack Obama, Vladmir Putin and David Cameron among others that India would also reform its tax system and financial sector. “The reforms that lie ahead are the more difficult reforms, relating to control of subsidies, reform of the tax system and reform of the financial sector. We are working on all these areas”, he said.

Raghuram Rajan’s opening blockbuster remarks also found mention in the PM’s speech. “The new Governor of the Reserve Bank of India has indicated important changes in banking regulations that will accelerate the reform process”, he said. These are being seen as a very public endorsement of Rajan’s plans by Singh, himself a former RBI governor.

However, it is the pain that emerging markets are facing due to the anticipated withdrawal of the “unconventional monetary expansion in advanced countries”, that was the key focus of the PM’s address.

“When policy was being loosened, there was a surge in capital flows to emerging markets, which helped some countries finance their current account deficits while generating upward pressure on the currencies of other countries”, he said.

The PM then added, “with markets now anticipating a reversal, we are seeing a large outward flow from emerging markets. Since most emerging markets now operate with flexible exchange rates, they have experienced varying degrees of currency depreciation, posing problems in many cases.”

The punchline came a little later. “The conventional view that capital volatility should not be a source of concern as long as exchange rates were flexible is now being questioned. Such flows led to excess leverage in the industrial countries before the global financial crisis. They are leading to stock market and exchange rate volatility in emerging markets today.”

This is thus perhaps the most forceful assertion by the Prime Minister yet on the spectre of a massive pullback of investment from India. This pullback would be all the more galling, given the pains that Singh took to tell the world that India was putting its house in order.

Singh, who is acknowledged within the G-20 as a authoritative voice on economic issues, then proceeded to tell other leaders that predicting the impact of monetary policy on capital flows is difficult, as it depends on how markets react.

Singh then repeated his core message on the withdrawal of the stimulus by telling the leaders that if they accept the need for coordination of fiscal policy among the systemically important countries, there is then “an equally compelling case to cover monetary policy in the reserve currency countries” and “room for more extensive consultation and communication on this issue”.

So, as negotiators from twenty countries move into the crucial phase of hammering out the final communiqu to be issued in the next 24 hours, the money is riding on what the US finally does on the issue. Russia, China and Brazil among other countries also seem to be on board regarding this matter. But the joint statement at the end of an informal meeting of the BRICS leaders here today made the new reality clear. The stimulus would mostly be withdrawn, and all that they want is that the “eventual normalisation of monetary policies, by certain developed economies, needs to be effectively and carefully calibrated and clearly communicated”.

That statement, more than any other in the recent past, underlines the issue. The taper is not a question of if, but only of when and how.