Hasty stimulus withdrawal could derail recovery: ADB

Asian Development Bank (ADB) today warned that hasty withdrawal of economic stimulus could derail the recovery process in the developing countries, even as India debates on timing of winding down incentives given to the industry to combat impact of global slowdown.

"As our region returns to the trend, exit strategies for fiscal stimulus must be carefully timed. If left too long, deficits will be unsustainable; if withdrawan too soon, the region's recovery could be derailed", ADB President Haruhiko Kuroda said in a speech at Singapore.

ADB chief's statement comes at a time when India is debating over the timing of withdrawal of three stimulus packages provided to the industry to combat the impact of global slowdown.

Prime Minister Manmohan Singh told India Inc last week, "We will take appropriate action next year to wind this (economic stimulus) down."

Finance Minister Pranab Mukherjee, however, held the view that incentives needed to be continued till there was robust recovery in the developed world which account for bulk of India's exports.

RBI, on the other hand, started the process of withdrawing stimulus last month. "The balance of judgement at the current juncture is that it may be appropriate to sequence the exit in a calibrated way... The exit process can began with the closure of some special liquidity support measures," Governor D Subbarao had said.

The monetary and fiscal stimulus measures taken by Asian economies appear to have worked with the region that is now showing signs of a V-shaped recovery, ADB President Kuroda said.

The regional development bank expects developing Asia's GDP growth to slow from 6.1 per cent last year to an estimated 3.9 per cent in 2009, returning to 6.4 per cent next year, ADB said in a statement.

Kuroda stressed that Asia must move forward on reforms that build on national priorities to bolster the regional agenda, while strengthening domestic demand as a more powerful source of economic growth.

He said the global financial crisis offers an opportunity for developing Asia to accelerate regional cooperation and integration, dialogue and institution-building. It is crucial to move forward on regional policy coordination, especially on exchange rates, he said.

Further, he said more action is needed on climate change, which poses a dire threat to the region's poor, food supplies and financial prosperity.