Delay in fiscal policymaking will be disastrous: Mukherjee

Finance Minister Pranab Mukherjee on Saturday asked advanced economies to "dispel policy uncertainty and dysfunctional political gridlock", warning of disastrous consequences for emerging and developing countries because of the West's dithering on decision-making.

"The immediate challenge facing advanced economies is the need to dispel policy uncertainty and dysfunctional political gridlock," Mukherjee said in his intervention at the Restricted Breakfast Session on Dialogue on Policy Challenges at International Monetary Fund headquarters here.

"The need of the hour is for decisive, preemptive action to alleviate the sovereign debt crisis. Stronger and more active financial support to the crisis-affected sovereigns must go hand-in-hand with expediting the badly needed repair of the financial sector and reviving the housing market," he said.

Mukherjee said it is important to strike the right balance between medium-term fiscal consolidation, which has become imperative, without hurting immediate growth prospects.

"The need of the hour is to reorient the fiscal strategy to focus on job creation and to invest in the development of infrastructure. Businesses must be incentivised to invest and create employment opportunities," he said.

"Those countries that have some fiscal space available and are not facing the erosion of market confidence may consider gradual fiscal consolidation to stabilise debt and fiscal deficits over a longer time span," he said, adding that the key issue is timing of consolidation and the amount of front-loading that the economy can bear.

Observing that it is important to consider what the appropriate policy mix should be, Mukherjee said in the near-term, fiscal policy will have to sustain domestic demand and monetary policy needs to be accommodative for providing an impetus to domestic consumption.

In the case of emerging and developing economies, he said although growth has generally been robust so far, overheating pressures have necessitated monetary policy tightening, which is now impacting the growth momentum.

"Meanwhile, inflation pressures from elevated commodity prices continue to persist. The ongoing food crisis in the Horn of Africa has once again focused global attention on the need for appropriate policy responses to the structural challenges affecting the developing world at large," he said.

Recurring bouts of financial volatility across the advanced economies, Mukherjee argued, could easily be transmitted to emerging and developing countries, with potentially disastrous consequences for growth and stability.

"This could lead to disruptive volatility in capital flows and create bubbles in the prices of financial assets and in markets, thereby complicating the task of macroeconomic management," he said.

"In emerging and developing economies, monetary policy tightening has been continuing due to inflationary pressures. Persistently high inflation puts pressure on policymakers in these countries, who will have to constantly monitor the trade-off between fighting inflation and maintaining growth," he said.

"Structural changes are needed for more sustainable growth and fiscal policy should be redesigned in order to strengthen its impact on employment creation and on prioritising public investments toward alleviating infrastructure," Mukherjee said.