It is in this setting that Finance Ministers and Central Bankers of G-20 (accounting for 80-90 per cent of world output and trade), at their meeting in St. Andrews, UK last week, agreed to maintain support to their economies until recovery is “assured”, in order to restore global economy and the financial system to health. Massive fiscal stimulus had been provided by most nations around the world to pull the economy back from the brink.

India has been a strong advocate of continued stimulus - a plea voiced by Prime Minister Manmohan Singh, at the G-20 Pittsburgh Summit in September - as emerging economies and other developing nations, in particular, link their own growth prospects with global recovery leading to resumption of exports, capital flows and investments.

The Prime Minister, however, noting signs of upturn in the domestic economy, indicated at the India Economic Summit on November 8 that “we will take appropriate action next year to wind down”, the significant stimulus resorted to from late 2008 to mid-2009. The G-20 Finance Ministers' communique provides scope for countries to implement such plans “flexibly taking into account variations in the pace of recovery and market conditions across countries and regions”. They also noted that monetary policies might begin to diverge between advanced and emerging economies in managing recovery from country to country.

Taking into account the build-up of inflationary pressures (food prices the most), RBI has already signalled a calibrated withdrawal of the substantial monetary accommodation extended by it since September 2008, injecting enormous liquidity into the banking system in support of economic activity though it has not effected any upward revision in key lending rates, in its recent quarter review of policy announced October 27. Finance Minister Pranab Mukherjee, who participated in the G-20 meeting, said on return that Government would retain some support to generate domestic demand till a “robust recovery takes place in developed markets”.

An IMF report for the Ministers also called for the preparation of an exit strategy considering the magnitude of the public intervention to bail out banks (in advanced countries) and rescue the economy (in all countries with varying degrees of stimulus), which for advanced G-20 nations would have raised the debt-GDP ratio by 40 percentage points over the pre-crisis level by 2014. This threatens to drive up borrowing costs by at least two percentage points, the report noted. But, it said, the timing of exit should depend on “the state of economy and financial system and should err on the side of further supporting demand and financial repair. While fiscal consolidation should be top policy priority, monetary policy adjustments could be more flexible when normalisation is needed.

The Pittsburgh Summit had committed G-20 nations to “strong, sustainable and balanced growth”, and the Ministers have given themselves a time-table to come up with an overview of their policies in this regard early in 2010, ensure completion of mutual assessments (peer review), with IMF involvement, by April next and discuss a range of policy options when they meet next in June 2010. These would be refined and developed for substantial policy recommendations at the next G-20 Summit in November 2010.

What is more worrisome has been the state of the international banking system which, though stabilised, is imperfect in many respects. Credit flows have not resumed, as expected, though some of the major banks in USA which were bailed out of crisis had repaid the Treasury with interest. New financial sector regulations are still evolving in European Union while the Obama Administration had presented its strong regulatory and supervisory plan to the Congress earlier this year. Banking and Finance Committees of the Congress are debating the legislation with Democrats wanting greater tightening of regulations in general.

After the 'stress' tests carried out by the Treasury and Fed in May last, looking into the capital base of banks to cope with future crises, ten large institutions have raised their equity base by 77 billion dollars as directed. Of the 19 largest banks, ten were ordered to cushion their capital base on the basis of assumed economic scenarios of deepening recession and high levels of unemployment. This was intended to increase public confidence in the US banking system. Banks in UK, partly nationalised in saving them, are yet not free of risks. Lloyds, the major British banking group, had government funds injected with 43 per cent ownership, remains heavily reliant on state support, and has been cutting thousands of jobs like the Royal Bank of Scotland and HSBC.

The G-20 Ministers emphasised the need for quick implementation of banking industry reforms with stronger standards by the end of 2010 with the aim of implementation by the end of 2012. EU has proposed its set of regulations which are being finalised by the European Commission. Most emerging and developing countries did not encounter any significant financial sector problems though impacted by contagion effect. India's financial system, even if its reach has to go far, is well capitalised and regulated but keeping in view the new Basel norms and a possible rise in bad assets from exposure to real estate and retail sectors, many of the public sector banks would go through recapitalisation. A World Bank loan of two billion has already been extended to India for this purpose.

Unlike the low growth in non-food credit in India, Chinese state-controlled banking system has over-extended itself, in stimulating the economy, which could lead to an asset bubble in the property sector. Banks in China were expected to end this year with total lending of 10 trillion yuan (more than 1.5 trillion dollars). A banking sector report said lending would continue into 2010 at 8 to 9 trillion, the largest in history though massive loan growth is estimated to have boosted banking profits by 10 per cent this year.

G-20 Ministers were also faced with the issue of executive compensation and excessive bonus payments. There was no consensus view. USA does not favour a cap but mandatory guidelines. There has been much public anger in America over the Wall Street firms making record bonus payments after being saved from a financial meltdown. The Congress is determined to make a special enactment on pay in financial sector. The G-20 pledge to maintain fiscal stimulus has meanwhile bolstered the stock markets all over.

Although the dollar has been under pressure for an extended period, the G-20 Ministers avoided any statement on currency movements though G-7 countries have always urged China to allow greater flexibility for its currency, renminbi, to move in line with market trends, to reduce global imbalances. President Obama has indicated he would take up the exchange rate issue with Chinese leaders when he visits Beijing by mid-November. China has been rejecting calls to let its currency appreciate and maintain that until exports revived they would keep the exchange rate unchanged, as it has been since July 2008. (IPA Service)