The evolving sovereign debt crisis in Euro-zone and volatility in financial markets evoked a reaffirmation by Ministers to “safeguard recovery and strengthen prospects for growth and jobs”.

Sustaining global recovery and Finance were the key issues the Ministers discussed in preparation for the fourth G-20 Summit in Toronto on June 26-27. Co-ordinated actions of G-20 nations last year helped to revive the global economy but the pace of expansion has been slow in advanced countries while many emerging economies like China and India are growing strongly. The European developments, however, created new uncertainties but underscored the importance of sustainable public finances and of credible growth-friendly measures “to deliver fiscal sustainability tailored to national circumstances”, according to a communique.

The communique reflected the stand of India's Finance Minister Mr Pranab Mukherjee that with significant challenges still lurking, there should be no rush to end stimulus package through fiscal and monetary measures, as it would undermine the ongoing recovery. There was general agreement that such withdrawal should be gradual in step with strengthening of private demand in their economies. At the same time, it was recognised some countries could come under market compulsions to start fiscal consolidation as a corollary to the recovery process and might be stagger it in over a period.

India is a case in point and with emerging signs of pick-up in growth, the budget for 2010/11 initiated the exit from fiscal stimulus while setting a time-table for fiscal consolidation. Fiscal deficit is sought to be lowered to 5.5 per cent of GDP from 6.7 per cent last year. Finance Minister Mr Pranab Mukherjee, who took part in the G-20 deliberations, later said the stimulus would be phased out during 2011-12. Mr Mukherjee cautioned against rushing to fiscal exit by advanced economies. This is to be expected as economies like China and India look for some external prop (demand) without which their own export revival would turn weaker.

While the Ministers were broadly agreed that tax payers should not have to bear the burden of rescuing banks, in case of a similar crisis in future, a universal levy on global banks was not acceptable to many countries, especially Canada, Japan and Brazil as their banking systems could tide over the recent crisis without help from Government. Likewise, India also does not favour it as, as Mr Mukherjee pointed out, its well-capitalised banking system had its regulatory mechanism.

But the communique at the end of the Busan meeting leaves room for individual countries to adopt from a “range of policy approaches” to ensure that banks make a “fair and substantial contribution”(as favoured by the G-20 leaders at their last summit in Pittsburgh - Nov.2009), to meet any burdens associated with government intervention.. IMF, which has asked to work out proposals in this regard, came up tentatively with a levy and would present its final recommendations to the Toronto Summit. Two leading developed economies, USA and UK, favour a tax/levy on banks.

USA, having launched a 700 billion dollar programme to assist troubled banks in the autumn of 2008, has been working on a levy as part of the financial regulatory reform legislation now before the Congress. The United Kingdom is expected to propose a levy when the new Chancellor of Exchequer Mr George Osborne presents the budget in the latter part of June. (For major banks, US assistance in late 2008 was around 250 billion dollars but many of them have since repaid dues to the Federal Government).

US Treasury Secretary Timothy Geithner said in Busan that there was within G-20 broad agreement on major elements, and “we should be able to move forward with agreement on core reforms” Reducing uncertainty about new rules would also help “to minimise financial headwinds for recovery”. He expected specifics on a new capital framework with stronger capital and liquidity requirements to be finalized before the 5th G-20 Summit was held in Seoul by the end of 2010. A transition period that allows financial institutions to meet the new rules over time would be set.

On the tough regulations proposed in the legislation now before US Congress, which the Obama Administration hopes would be sent to the President in July, Mr Geithner said these included strong framework for oversight of derivatives market, improved tools to manage the failure of global financial institutions and common principles to free taxpayers from the financial costs of financial crises.

The Finance Ministers, preparing for the Toronto Summit, agreed on the need for greater transparency and further strengthening of banks' balance sheets, rigorous capital and liquidity rules to allow financial firms to withstand future downturns, and for phasing new rules in as financial conditions improve and economic recovery is assured, with the aim of implementation by end-2012.

In regard to banks making a “fair and substantial contribution” as the last G-20 Summit prescribed, the Ministers agreed to develop principles reflecting the need to protect taxpayers, reduce risks from the financial system and protect the flow of credit in good times and bad, taking into account individual country's circumstances and options, according to the communique. India and other emerging economies have also urged speedy completion of work for IMF to complete reform of country representation and quotas by the time the fifth G-20 Summit takes place in November 2010. A similar urgency was voiced on World Bank reform.

A major part of G-20 agenda relates to reducing global imbalances and for achieving strong, sustainable and balanced growth in the world economy. Mr Mukherjee referred to the Framework exercise undertaken in this regard and said while structural reforms for raising growth were important, they should be seen to be creating jobs in order to command political acceptability. The Framework also ought to lay emphasis on poverty alleviation in developing countries, he said. Investments were needed for human resource development and for infrastructure and resources for development should therefore figure in the Framework as official development assistance (ODA) by itself cannot meet financing needs of developing countries, even if ODA does not get sacrificed at the altar of fiscal consolidation. (IPA Service)