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Address of Finance Minister Pranab Mukherjee to BRICS

We are meeting here at the time when global economic growth seems to be losing its momentum after about a year and half of fragile and uneven recovery.  There are signs of economic and financial weaknesses in Europe and the US that threaten the global economic outlook.  The robust and quick recovery in EMEs also seems to be running out of steam.  It is important that at this juncture the BRICS countries have come together to discuss the implications and the possible policy responses to the emerging situation in the US and Europe and in doing so make an assessment around the following agenda points:-

o                    State of the global economy and current risks;
o                    Policy response in advanced economies and market reaction;
o                    BRICS policy response and coordination;
o                    BRICS Report
Which we shall discuss during the course of this meeting. 

I suggest that in view of the time constraint all the agenda items may be taken up together. 

Global economic growth seems to be decelerating recently with a downward revision in growth projections of both advanced and Emerging Market economies after about a year and half of fragile, uneven and multi--paced recovery.  The weaknesses in major developed economies continue to be a drag on global recovery and poses risks for world economic stability.  Despite the return to growth, unemployment levels in the United States remains at unacceptably elevated levels.  With the near term growth prospects in both the US as well as in the European countries appears to be rather bleak, and according to experts, the chances of a double dip recession cannot be ruled out.  In the euro zone, the indications are that drastic austerity measures might entail a recession without resolving their debt sustainability problem, and possibly also affect the growth prospects of other neighboring European economies.  There is also a fear that Euro zone sovereign debt crisis could spread to some larger countries that are too big to be bailed out.  The European banking system is also at risk on account of its exposure to peripheral sovereign bonds and cross holdings that make them vulnerable to contagion from assets not directly on their balance sheets.  Growth in Japan also remains a source of concern following the after effects of the earthquake and tsunami.
It is therefore evident that the revival of the global economy following the financial crisis of 2008 has started to falter.  Successive numbers on growth, industrial production and forward looking indicators are suggestive of an impending recession in advanced economies.  The most serious and immediate problem faced is the debt crisis in several advanced economies with the market perception that public debt of these countries could continue to rise even as growth remains subdued.  Even under conservative assumptions, debt in relation to GDP will continue to rise and exceed the 100 per cent on an average for the next few years and many advanced economies will face large and increasing funding needs.   While a spike in debt has always followed deep recessions, advanced economies have been able to grow their way out of high levels of debt in the past.  However, the recent demographic changes make the growth prospects in several developed countries much more challenging.  As and when interest rates rise, levels of public debt might become more and more unsustainable.

Corresponding to the rising public debt, the risk of enhanced financial fragility has also increased because public indebtedness has got intricately linked to the health of the banking sector.  There is risk that the debt of these two parties will feed into one another and form a vicious circle and amplify the risk throughout the world.  Markets seems to be speculating that while Sovereigns could bail out the financial sector, the only way sovereigns can be bailed out  is through higher quantitative easing that is likely to eventually result in inflationary outcomes.

Currency markets are also being impacted due to investors seeking safer havens.  The consequences has been increased volatility of capital flows, and heightened prices of safe haven assets like gold, US Treasuries and also commodities.  The deleterious effects that these developments would have on the global economy are issues of concern.

The advanced economies, most notably the US, has had to keep in place a policy of aggressive fiscal stimulus and cheap money for an extended period in their effort to help the financial sector’s return to normalcy and to stimulate economic activity.  However unusually low interest rates and two rounds of quantitative easing in the US have so far has not resulted in a sustainable revival of the real economy.  On the contrary, it had added new risks, including greater volatility among major currencies and commodities, and a surge of volatile capital flows to emerging markets.  Measures taken from time to time in the euro zone to deal with the crisis emanating from the peripheral economies have also not been successful in stabilizing the situation and reassuring the markets. What is adding to the market nervousness is perhaps the apparent lack of confidence in the ability of policy makers to adequately handle a possible “double dip” since both fiscal and monetary tools seem to be exhausted.  Another major risk factor is that any rise in protectionist tendencies as a knee-jerk reaction to persistently high levels of unemployment in advanced countries would further worsen the economic sentiments and the growth prospects of the EMEs and indeed the rest of the world.

In key advanced economies, the necessary hand-off from public to private demand is not taking place. The fundamental problem is that weak growth and weak balance sheets of governments, financial institutions, and households are feeding negatively on each other. If growth continues to lose momentum, balance sheet problems will worsen, fiscal sustainability will be threatened, and the scope for policies to salvage the recovery will disappear.

An area of major concern is that financial markets continue to be in state of uncertainty showing little confidence in the growth prospects and policy actions taken by sovereign governments particularly in advanced markets.  As I had said previously, the most serious problem faced on an immediate basis is the market perception that public debt of developed countries will continue to rise even as growth remains subdued. The downgrading of US sovereign long-term debt by Standard and Poor`s, is nevertheless a clear indication of a lack of conviction about policy action.  The fall in several global forward looking indices also reflects in some ways a similar sentiment.

The BRICS economies have been key drivers of the global recovery, but even their growth is faced with the challenge of inflation and continuing uncertainty in global financial markets.  The volatility in capital flows arising from policy choices is a further source of vulnerability.

I would like to have your views and concerns on the global economy and current risks we face. Some of the questions that need to be addressed are:

·                     How should policy response be coordinated at the international level, especially since global economic cycles seem to be divergent;
·                     What, if any, should be the role of the IMF and other IOs in ensuring that the world transits more smoothly through the current turmoil?
·                     What steps BRICS can take in the current situation.

Now taking up the last agenda item, I would like to recap our earlier resolve at the London meeting on September 4, 2009 to commission a study by our Finance Ministries and Central Banks regarding where the world economy will be heading in the near future and the role of the BRIC countries. Given the fact that the emerging markets of Brazil, Russia, India, China and South Africa  would come to play a dominant role in the global economy, it will be important for the group to explore the role of the BRICS countries in the face of the emerging global challenges  and identify areas of cooperation and synergies between BRICS countries for promoting mutual growth and collectively harnessing the global economic recovery. We expect that the global community that has so far looked at BRICS from the viewpoint of investment bankers, would be interested to get the BRICS’s own perspective of their role in the global economy.

India offered to Anchor this report. I am glad to inform you that recently a workshop was held in New Delhi wherein experts from Finance Ministries and Central Banks discussed and provisionally finalised the study. I am happy to share the third draft report in this regard and would simultaneously call on our experts from Finance Ministries and Central Banks to finalise this report at the earliest and present the final report before our next meeting as a group.