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Rediff.com  » Business » Global economy can bounce back: Chidambaram

Global economy can bounce back: Chidambaram

April 21, 2013 14:00 IST

India's policy focus in recent months has been, on containment of fiscal deficit, along with measures that would boost investment levels in the economy.

World economy can bounce back if the advanced economies remove policy uncertainties, Finance Minister P Chidambaram said on Sunday, maintaining that the Indian economy has been impacted by the global growth slowdown.

In his address to the International Monetary Finance Committee in Washington, Chidambaram said there has been marked improvement in financial market sentiment in the recent period following some significant measures announced by policymakers in the Euro area and the US.

"The global macro-economic situation is also beginning to stabilise. Although confidence has improved, it still remains fragile and the global economy continues to face several critical challenges," he said.

"Despite all these uncertainties, the global economy can bounce back if advanced economies continuously keep progressing on removing policy uncertainties and if we are able to remove some of the major bottlenecks in the real sector of the economy," Chidambaram said.

Addressing the annual Spring meeting of the IMF, Chidambaram said, global growth remains weak and the global economy continues to face several risks.

He said the present state of the global economy continues to pose several challenges for policymakers in advanced and emerging economies.

"Moreover, some new concerns have also arisen. As such, the global economy continues to pose huge challenges for policymakers, particularly in advanced economies," Chidambaram said.

Although the re-balancing of the Euro area continues, recent developments in Cyprus suggest that the situation in the Euro area is far from settled, he said.

He also spoke about India's economic situation, saying that the Indian economy was impacted by the global growth slowdown, while several domestic constraints also acted as a drag on economic activity.

"Economic activity in India remains somewhat sluggish. Given its relatively high degree of openness, the Indian economy was impacted by the global growth slowdown. At the same time, several domestic constraints also acted as a drag on economic activity," Chidambaram said in his address. To address the concerns of the Indian economy, the authorities have taken several measures in the recent period, Chidambaram pointed out.

The policy focus in recent months has been, on containment of fiscal deficit, along with measures that would boost investment levels in the economy and help raise the growth rate, he said.

A Cabinet Committee on Investment (CCI) has been set up to remove blockages and fast-track the implementation of large projects, especially infrastructure projects, the Finance Minister said.

Informing the IMF meeting that a plan is being implemented to gradually roll out direct cash transfers using Unique Identification Numbers (UID) beginning 2013, Chidambaram said eventually, cash transfers will be the preferred mode for the disbursement of subsidies and other monetary benefits to improve efficiency and avoid duplication and leakages.

Efforts are underway to pen the laws and implement the Goods and Services Tax (GST) and the Direct Tax Code (DTC) as early as possible, he said.

Inflation in India has begun to moderate, he said, noting that core inflation, in particular, has moderated significantly.

"Together with the measures taken for fiscal consolidation, this has provided space to the Reserve Bank of India for some monetary easing. To address growth concerns, the Reserve Bank has cut its policy rates twice during the last three months," he said.

Observing that the authorities in India are concerned with the twin deficits and are taking measures to contain them, the Finance Minister said the gross fiscal deficit has been reduced from 5.8 per cent in 2011-12 to 5.2 per cent in 2012-13 and it has been budgeted still lower at 4.8 per cent for 2013-14.

Public debt continues to follow a downward trajectory with the central government's gross debt declining to 45.9 per cent of GDP during 2012-13, the Finance Minister pointed out.

India's current account deficit has remained elevated during the last several quarters mainly due to widening of the trade deficit reflecting weak external demand and large imports of oil and gold, he said.

"Although the current account deficit has been financed by increased capital flows, the government is committed to bring it down over time. Various measures taken by the government combined with recent monetary policy easing by the Reserve Bank of India are expected to revive investment activity and help take the economy to a high growth trajectory," Chidambaram said.

Since the onset of the current global crisis, unexpected developments keep occurring periodically and add to uncertainty, he said.

It would not be overstating matters to say that the key to global stability is to restore stability to Europe, the Finance Minister pointed out.

"While Europe has to be commended for the steps it has taken so far, they may prove to be inadequate unless the major policy measures announced recently, such as the setting up of a Banking Union, are completed," he said.

Continued fragmentation of the banking system and delay in cleaning up banks may result in continued economic weakness.

There is also need to make further progress in strengthening the economic and monetary union, Chidambaram said.

Restoring growth would be the key driver to addressing the debt problem in the Euro area, the Finance Minister said.

According to Chidambaram, despite some slowdown, emerging market economies remain the strongest source of global growth, reflecting resilient domestic demand conditions and healthy banking sectors.

"Growth in emerging market economies (EMEs) is now beginning to pick up. Capital flows to these economies have increased, reflecting improved financial market conditions, but they are also a consequence of the excess liquidity in global markets and the search for higher yields," he said.

"Consequently, policymaking in EMEs will need to continue to be vigilant to the possibility of financial instability resulting from any reversal of capital flows. Volatility in oil prices also remains a concern for EMEs," Chidambaram said. Former Union Minister and noted economist Y K Alagh said: "Price of gold has gone down. In short run would work in both way... partly it would discourage people from buying but on the other hand people might feel that price of gold is low so this is time to buy it."

Lalit K Jha in Washington
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