Political India: Engaging America

Labels: Barack Obama, economic growth, economic recovery, U.S. economy

From The Hindu

The Group of 20 major economies is assuming more importance than the World Bank and the International Monetary Fund (IMF) “in matters of money and finance,” according to Finance Minister Pranab Mukherjee, who is in the United States for the annual meetings of the multilateral bodies.

At a media interaction here after the meetings, Mr. Mukherjee argued that since nearly 85 per cent of world output came from the G-20 countries “there should be some linkage” between this fact and the governance of global financial market and development finance.

The format of the meetings between the G-20 Finance Ministers and the heads of the World Bank and IMF was undergoing some change. Earlier the IMF Managing Director and the World Bank President would present the views of the two organisations at meetings of the G-20 Finance Ministers and then those presentations would be reflected in the communiqué issued, he noted.

But, Mr. Mukherjee said, “This time it was also suggested that the member-countries of the IMF and the World Bank, who are also members of the G-20, should also get the views of these two organisations in respect of current economic developments, in their presentations before the G-20 Finance Ministers conference.”

In addition to governance issues, he said, the meetings entailed discussions of the Bank's and Fund's annual report. The G-20 Ministers also discussed country quotas at the Bank and Fund although “no solution has been found out but talks are going on,” he observed.

Another key issue that emerged was the fact that the Bank had stretched its resources “almost to the point where, from next year onwards, there may be less lendable resources.” The possible options for augmenting the organisation's lendable resources were also discussed.

In a significant change of format, the speechmaking was also kept to a minimum, the Finance Minister said. While in earlier years members' speeches sometimes lasted two whole days, this year “they had to send their video cassettes, either recorded here or recorded [in their home countries], and that will be put on the website.” As a result, the meeting of the General Body was completed within one hour.

Currency valuation issues “should not” be made a top priority in the G-20 meetings context, he said.

In a response to a question from The Hindu whether there was pressure from the U.S. for India to liberalise the banking and insurance sectors, Mr. Mukherjee said such reform was only being stalled due to the Congress not possessing a majority of 472 seats on the floor of Parliament.

The H1-B visa fee hike issue as well as the U.S.' export controls and its Entities List were still being discussed between New Delhi and Washington, he noted.

Labels: economic recovery, G20 Finance Ministers meet, IMF

From The Hindu

Shares tumbled on Wall Street and elsewhere in global financial markets this week as the United States Federal Reserve put out gloomy forecasts for the pace of the domestic economic recovery. In a statement, the Fed’s Federal Open Market Committee, its interest-rate-setting body, said, “The pace of recovery in output and employment has slowed in recent months.”

Citing the high rate of unemployment as a major drag on economic growth, the FOMC said, “Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” The Committee added that business spending on equipment and software was rising, yet investment in non-residential structures continued to be weak and employers remained reluctant to add to payrolls.

Expressing outright pessimism in some sectors, the FOMC said that housing starts remained at a “depressed level” bank lending “has continued to contract” and the pace of economic recovery was likely to be “more modest in the near term than had been anticipated”.

Coming on the back of a July joblessness report showing that 131,000 jobs were lost that month, the news from the Fed drove financial markets down. American equities continued to drop on Thursday after relatively steep declines on Wednesday too. Markets in Europe and Japan followed suit.

Only area of positive news

The sole area of positive news coming out of the Fed, however, was in the prognosis for inflation. The Fed said, it anticipated “a gradual return to higher levels of resource utilisation in a context of price stability”, and measures of underlying inflation had trended lower in recent quarters. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation was likely to be subdued for some time, the FOMC added.

In the light of such predictions, the Committee said it would maintain the target range for the federal funds rate at 0 to 0.25 per cent and continued to anticipate that economic conditions would warrant “exceptionally low levels of the federal funds rate for an extended period”.

The Fed further noted that in order to help support the economic recovery in a context of price stability, the Committee would keep constant the Fed’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.

While most of the FOMC supported this view of the economic situation, the Fed conceded that on member of the Committee, Thomas M. Hoenig, had opposed the view, as he had judged that the economy was recovering modestly and believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Labels: economic recovery, U.S. Federal Reserve

From The Hindu

Striking a note of optimism about the global recovery following after one of the most serious recessions since the 1930s, the International Monetary Fund today said that the recovery had “evolved better than expected.”

In its just-released World Economic Outlook the Fund said that economic activity was recovering at varying speeds across nations, however, at a “tepid” in many advanced economies but “solidly” in most emerging and developing economies.

Emphasising the particularly positive news coming out of developing countries the influential report said that “countries such as Brazil, China, India, and Indonesia are already sustaining a strong rebound, even in the face of weak recovery in the advanced economies, quickly re-attracting capital flows.”

The Fund attributed this rebound to the absence of both long-lasting shocks to the financial systems of developing countries and of large increases in unemployment rates. As a result many of these countries were able to “deploy sizable fiscal and monetary stimulus.”

Reflecting the new concern about inflation, which the Reserve Bank of India recently moved to quell through an interest rate hike, the report said, “In various Latin American, Middle Eastern, and CIS economies, inflation slowed but remained relatively high throughout the cycle, and in India it rose strongly.”

Amongst advanced economies the IMF said policy support had been essential to “jump-start” the recovery. In particular monetary policy was highly expansionary and supported by “unconventional liquidity provision,” while fiscal policy had provided a major stimulus in response to the deep downturn. The Fund noted that among advanced economies, the United States was “off to a better start” than Europe and Japan.

World economy poised for further growth

Expressing cautious optimism for the prognosis of global growth the Fund argued that world economy would continue to recover “but at varying speeds across and within regions.” It said that global growth was projected to reach 4.5 percent in 2010 and 2011.

Advanced economies were now expected to expand by 2.5 percent in 2010 and 2011, following a decline in output of more than 3 percent in 2009, the IMF said, adding that growth in emerging markets would however be “over 6.5 percent during 2010–11,” following a modest 2.5 percent growth in 2009.

Labels: economic recovery, economy, global recovery, growth, IMF