Washington DC
October 5, 2004

With world economic growth peaking at a thirty-year high, in the just concluded Annual Meetings of the International Monetary Fund and the World Bank, the Union Finance Minister of India, Mr. P. Chidambaram stressed the need for reinforcing the signs of the broad-based diversified expansion through improved international cooperation in achieving stability and strengthening policies and institutions. This, he said, would enable different regions to mutually support and reinforce growth-enhancing prospects and trigger a virtuous cycle.

The Indian Finance Minister said that along with China and emerging Asia, India is poised to become a major driver of global growth in the medium term. India has pursued its own design of domestic economic reforms since the early 1990s duly incorporating the impact of political cycles. The new government is committed to reforms but with a human face, involving emphasis on health, education, and employment. The key to growth, the government believes, is enhanced investment: public and private, domestic and foreign. Despite a delayed monsoon and oil price pressures, the economy is expected to grow in the range of 6.5-7.0 per cent this year. A strong revival of investment demand and business confidence is evident. The external position has added to overall confidence and the country’s credit standing has improved in international markets. Fiscal consolidation remains high on the agenda; and the new government has demonstrated its commitment by notifying the Fiscal Responsibility and Budget Management (FRBM) Act and the detailed rules for its implementation in July this year. Further liberalization of the external sector has been announced, and the government is committed to promoting multilateral trade liberalization policies in the spirit of the Doha round. No doubt, the current outlook for oil prices makes the macroeconomic management in India very comples. Monetary policy will continue to emphasize price stability with growth, he said.

To minimise the risks to the expansion from continuing uncertainties in the international oil markets, he called for better international cooperation on the part of both oil producing and consuming countries, for the multilateral institutions to stand ready to support countries exposed to any potential threat of oil or commodity price shocks. He expressed the hope that, for containing the inflationary pressures across regions the reversal of interest rates by central banks will be undertaken cautiously and in measured steps.

Mr. Chidambaram said that the reversal of capital flows from emerging markets to mature markets seen in the recent past reflected self-insurance role of reserves built-up in mitigating the risk of external shocks. Equally, it was a sign of the inadequacy of the existing international financial architecture in providing any viable collective insurance to well-managed economies, he said.

The Indian Minister of Finance called for steps to scale up assistance to developing countries for achieving the millennium development goals (MDGs), and a resolute implementation of the Monterrey Compact. With the promised additionality of resources failing to materialize even after two years of the Compact, the MDGs continue to remain a distant dream even for the best performers among developing countries. He recommended firm measures to move away from allocation of the bulk of the existing concessional resources on considerations other than the twin criteria of ‘need’ and ‘performance’. For implementing the MDGs in low income countries, he called for an ex-ante framework to assess sustainability of their debt situation, which could help borrowers, lenders and the international financial institutions take informed decisions without adding further to their debt burden, and at the same time avoiding the moral hazard implicit in lending and forgiving.

Instead of its delivery in a piecemeal, uncertain, and inequitable manner, there was a need to move to its distribution through multilaterals with transparent allocation criteria and a track record for ensuring effective results on the ground. He welcomed the move by the Bank and the Fund to put donor coordination and harmonization high on their agenda and called on the Bretton Woods Institutions to further enhance their efforts to make the promised levels of additionality in overseas development assistance (ODA) a reality, particularly in the context of IDA’s fourteenth replenishment. The time for the donor countries to deliver on their Monterrey commitment for a substantial scale up in ODA is now, he said. He expressed his deep concern about the negative net flows from the Bank in the recent years, and called for urgent steps to check the rising trend in administrative costs, reduce borrowing charges and rationalize the safeguard compliance framework. There was an urgent need to step up infrastructure lending in a big way, and for redoubled efforts to address the needs and concerns of the middle-income countries, who have hitherto been the Bank’s best customers. This would reverse the trend of negative net flows, he said.

Mr. Chidambaram stressed the need for the international financial institutions to exert their positive influence in creating an appropriate international environment for multilateral trade negotiations. The global trade agenda calls for renewed vigor on the part of the Bank and the Fund to strengthen their advocacy role for a phasing out of protectionist policies in developed countries, he said.

Expressing his disappointment over the lack of effective voice in the functioning of Bretton Woods Institutions, Mr. Chidambaram called on world leaders to back up their positive assertion at Monterrey by sufficient political resolve to move purposefully to address the structural inconsistency that lies at the root of this lack of voice. The allocation of quotas at the Fund and the pattern of shareholding at the Bank have ceased to reflect the economic realities of the day. The search for a greater voice for developing countries must begin with a review of the quota allocation formula. Without the necessary resolve to move in this direction, the voice issue will continue to remain a mere distraction from the core business of the Bretton Woods Institutions, he said.

Mr. Chidambaram held bilateral meetings with Finance Ministers from Bhutan, Brazil, France, Germany, Israel, Japan, Singapore, Sri Lanka, and with the Development Ministers of UK and Sweden. He welcomed investment from all countries to effectively utilise the rich potential that India has for augmenting growth and employment.

Mr. Chidambaram met with US Treasury Secretary John Snow when they discussed bilateral and multilateral issues of mutual interest. They underscored the importance of continuing the bilateral dialogue under the Financial and Economic Forum. Mr. Chidambaram also outlined the new Government’s approach to economic reform and foreign investment and the particular emphasis being given to the rural and agricultural sector and infrastructure.