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Following is the text of Finance Minister Shri P. Chidambaram’s speech delivered at International Monetary and Finance Committee (IMFC) Meeting on April 16,2005:
“ The robust growth of the global economy at 5.1 percent in 2004 has been beneficial to most countries. I agree with Mr Roger Ferguson that these were indeed the best of times. For example, in India, we have benefited from high growth and benign inflation. But, downside risks persist as all of us present here surely recognize. Allow me to dwell on two of these risks, and the imperative need to insure ourselves against these risks.
First, the unbalanced nature of growth and widening current account imbalances continue to pose a serious risk to sustained global growth. There is a growing consensus that the adjustment of these imbalances needs to be paced and sequenced in a non-disruptive manner, and the appropriate broad strategy to address these imbalances includes fiscal consolidation in the US, structural reforms in the Euro area, continuing monetary stimulus in Japan, and greater exchange rate flexibility in emerging Asia. In any case, the persistent risks call for a contingency plan, a plan will indicate possible alternatives to avert any abrupt unwinding of these imbalances. Such a contingency plan has to be a coordinated action and has to be worked out after consultations among the G-7 and the G-20 countries. The action should address, among other issues, vexed questions such as how much of the adjustment should be borne by interest rates and how much by exchange rates. The answer will have to take into account the ramifications that increases in interest rates will have on the growth momentum of the global economy. We must acknowledge that in the recent past the benign interest rate regime and price stability have contributed a lot to firing the engine of growth, particularly in the developing world.
Second, the high-level of oil prices and possibilities for its further increase are straining the growth performance of many economies, particularly the oil-importing developing ones. Excessive volatility in oil prices assumes a riskier dimension when oil prices are already high and such volatility may reflect market imperfections. The price of oil will of course reflect its characteristic of an exhaustible natural resource. But, we need to guard against market distortions. Given that oil is a universal intermediate, the efficiency costs of imperfections in the oil market can be large not only for oil importers but also for oil exporters. The burden of high oil prices has, however, fallen disproportionately on the developing countries. In India, for example, the average price of the Indian basket of imported oil was $28 in 2003-04, it increased to $39 in 2004-05, and so far in 2005-06 it is ruling at $52 per barrel. I need hardly emphasize the need for moderation and stability in oil prices. The oil market has systemic implications for the world economy, and I commend the Fund and Mr. Rajan for addressing this issue of systemic importance seriously, as part of multilateral surveillance.
Finally, let me commend the staff for their essay on workers’ remittances. It is indeed a stable source of financing for many developing countries and contributes directly to reducing poverty for those the workers leave behind at home. There is one other aspect, however, that needs to be emphasised as well. That is, the flip side of these remittances in terms of the output and value that it generates in the country where these remittances originate. These remittances are likely to increase as the differential demographic dynamics, particularly the age composition of the population, become more pronounced. Activation of Mode 4 of GATS, namely movement of personnel for service delivery abroad, will accelerate these flows and enhance welfare both in the country of origin as well as the destination country. Efforts should continue to focus on improving the efficiency of the banking systems, and measures to simultaneously encouraging the non-banking intermediaries like money changers and exchange bureaus, to undertake cross-border transfer of funds at reasonable cost. Reductions in transaction cost will facilitate larger flows through organized channels. 'Know Your Customer' regulations must apply to all financial flows, whether domestic or international, but we must be wary of subjecting remittances to any extra rigour of such provisions. After all, money of dubious origin crosses borders in many garbs, and not necessarily only in the garb of small sums earned by an honest worker abroad and remitted home.”
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