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Following is the excerpts from the speech of Finance Minister, Shri P. Chidambaram delivered at Commonwealth Finance Minister’s Meeting on “World Economic Situation and Prospects”, being held in Barbados from 18th to 20th September, 2005:
“It gives me great pleasure to share with this august gathering some thoughts about the current world economic situation and the risks and uncertainties facing it today.
Backdrop of High Growth
The global economy had witnessed a sharp upturn in 2004, reflecting increased economic activity in both advanced and developing economies. Global GDP growth increased from 4.0 per cent in 2003 to 5.1 per cent in 2004.
Growth Slowdown in 2005
In 2005, growth appears to have slowed down, with global output and world trade estimated to rise at slower, but still impressive and higher than average, rates. While world output is projected to grow by 4.3 per cent, world trade volume is estimated to rise by 6.6 per cent. Growth has been severely dampened by rising oil and commodity prices, less accommodative macroeconomic policies and, in some countries, cooling of the housing market.
Regionally, growth remains strong in the US economy, with steady improvement in labour and financial market conditions along with firm real estate prices in the first half of the year. However, given the low levels of household savings, a slowdown in private consumption growth remains a major risk.
Growth prospects have moderated for the Euro area, where the encouraging revival in the second half of 2004 has given way to faltering domestic demand in the first half of 2005. Internal developments have cast a shadow on market confidence and medium-term outlook for the region.
Robust private consumption, brought on by strengthening labour market conditions, has sustained the growth momentum in the Japanese economy. The high confidence of the Japanese people in strong reform measures was reflected in the recent thumping victory for Prime Minister Junichiro Koizumi and his Liberal Democratic Party.
For sub-Saharan Africa, growth prospects have been moderated somewhat, mainly on account of a sharp slowdown in Nigeria, where oil production is nearing capacity.
A significant feature of global growth has been the emergence of Asia as an engine of growth in the world economy. It has been shaped significantly by the increasingly important role for China and India.
For emerging markets and developing countries, particularly developing Asia, growth prospects continue to remain robust, with China and India continuing to spearhead such economic activity. Economic growth in India is expected to remain robust at 7.0 per cent in fiscal 2005-2006, given the monsoon outlook and strong industrial performance. During the first four months of the current fiscal 2005-2006, industrial production has increased by 9.3 per cent and exports and imports, in dollar value, by 21.3 per cent and 32.3 per cent respectively. Business confidence polls also generally report bullish expectations. Annual inflation, point-to-point, has been contained to 3.16 per cent as on September 3, 2005, and foreign exchange reserves (excluding gold and SDRs) stood at US$ 139.56 billion as on September 2, 2005. The economy is in a resilient mode with sustained growth in the industrial sector, moderate inflation, a buoyant capital market, comfortable foreign exchange reserves and a satisfactory monsoon.
Some concerns remain over possible “overheating” of the Chinese economy with investment continuing to be the prime determinant of such growth. A surge in exports and rise in investment resulted in strong growth of the economy in the first half of 2005. Surge in exports was aided by acceleration in textile exports post quota abolition and continued build up of competitive manufacturing capacity. China also registered a record first half trade surplus.
Benign financial market conditions continue to prevail in 2005. Equity markets remain resilient across the world, mainly on account of strong corporate profits. Emerging market prospects for external financing conditions remain broadly favourable as well. Net private capital flows to emerging and developing countries, however, are projected to decline in 2005.
RISKS AND UNCERTAINTIES
Crude Oil Prices
High and volatile global oil prices continue to remain a significant and serious risk to global economic outlook. Crude oil prices have more than doubled since mid-2002 with monthly average prices increasing from around US$25 per barrel in June 2002 to around US$61 per barrel in August 2005. It breached US$70 per barrel on 30 August 2005. If oil prices continue to remain at their current highs, the adverse impact on real disposal incomes of global consumers may be felt in the remaining months of 2005. Any further increases in oil prices are likely to make deeper impacts on inflationary expectations, and may result in interest rate hikes and onset of adverse supply-side effects.
The destabilizing effects of higher oil prices will be more impoverishing for the low income oil importing countries. Such countries tend to spend a large part of their income on energy requirements, and often lack access to international capital markets. The International Monetary and Financial Committee Resolutions of 2004 and 2005 called for efforts to remove disincentives to investment in oil production and refining capacity, and to promote energy sustainability and efficiency, including through new technologies and removing barriers to the development of alternative fuels. A more effective surveillance of the impact of higher oil prices, especially on the most vulnerable, was also emphasized. In this context, the G8 countries seem to be doing little to moderate oil prices.
In real terms oil prices are below the peaks reached in the 1979 oil crisis. With further rise in oil prices, while a replay of the earlier crisis is unlikely, primarily because of improved oil efficiency of the global economy, the vulnerability of oil importing developing countries to growth shocks cannot be ruled out. Such adverse effects on economic growth will impact on their poverty reduction potential, thus putting in peril the timely achievement of the Millennium Development Goals.
Global Payments Imbalances
Another concern for global economic prospects for 2005 is the increasing global payments imbalances. Divergent rates of growth, savings and investment across the major regions of the world are unlikely to be self limiting in the short run.
The risks to global growth arise from imbalances in the current accounts of balance of payments, the fiscal imbalances, hedge fund activity, elevated asset prices and the excessive leveraging in some advanced countries. The large global current account imbalances probably represent the greatest short term risk for stable growth in the world economy. A well coordinated international macroeconomic approach would not only enhance the chances of the developing countries to consolidate their recent improvements, but would also avoid any deflationary adjustments to the global imbalances.
Trade Talks
With rise in protectionist sentiments – for example removal of quota on textile and clothing triggering safeguard actions - the current trade talks become critical for the world economy. After the failure of the WTO Ministerial in Cancun in September 2003, the August 1, 2004 General Council decision had helped to put the Doha development agenda back on track. However, progress thereafter has been limited and considerable work remains to be done. To this end, the timeline of end July 2005 for “first approximations” of the modalities in the key areas of agriculture and non-agricultural market access has already been missed. The WTO Ministerial meeting in Hong Kong in December 2005 will need to reach agreement on negotiating modalities for agricultural products and manufactured products, and to make concrete progress on negotiations on services, rules, trade facilitation and on the development dimension of the round. The negotiations are caught up in demands for elimination of export subsidies and domestic support for farm products in advanced countries and of greater access to developed country markets for non-agricultural goods and services. Achieving an ambitious outcome from the Doha round requires a renewed commitment and sense of urgency from all WTO members.
The centrality of the development dimension was emphasized in the Doha Ministerial Declaration. Indeed, a pro-development outcome is extremely important. Implementation and Special and Differential Treatment issues are special areas where desirable outcomes are required. This would require a transparent and inclusive process. India is ready to play its part in these negotiations for a pro-development and balanced outcome.
IMF and World Bank Issues
We welcome the proposals for intensifying the global development partnership for helping Africa. It is particularly heartening to note the G-8 commitment to double aid to sub-Saharan Africa by 2010. India has been proactive in supporting African nations in their development efforts and has also been sharing development experiences with them.
We appreciate the G8 proposal to cancel the debt stocks of the 18 post-completion point Heavily Indebted Poor Countries (HIPCs). The proposal will go a long way in consolidating the progress of the HIPCs towards achieving the MDGs. However, some complications, involving impact of the proposal on the Fund-Bank resources, require substantive debate. For the Fund, the issue of ensuring uniformity of treatment among its members has come into sharp focus. While providing this relief, it is important to preserve the Fund’s capacity to assist low income countries (LICs) with concessional lending. In the same vein, the IDA debt relief proposal, to be funded ‘dollar for dollar’ by donors, should ensure that no IDA recipient is worse-off at any point during the debt relief process. The financial integrity of IDA should not be impaired in any way since the agency remains pivotal to global development efforts.
We also look forward to all the donor nations honouring the commitment made at the Monterrey Conference for scaling up aid and achieving the targets set out for financing the MDGs. The financing and achievement of MDGs are closely linked and we hope that a consensus on the suggested innovative financing mechanisms is achieved soon.
The Commonwealth member countries account for 30 per cent of the world’s population and about 25 per cent of its international trade and investment. These countries are major stakeholders in the process and the success of the Doha Development Agenda, accounting for 40 per cent of WTO’s membership. The Commonwealth could thus be of great help in deliberating and arriving at a consensus on some of the major economic issues facing the world today. As the Commonwealth represents developed, developing and least developed countries, constructive engagement amongst its member countries could be utilized in bridging the North-South divide. A stronger Commonwealth voice could be a voice of reason and a voice for growth and equity.”
BY/GN-241/05
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