India urges G20 to stagger stimulus exit

World economies decide to scrap plans for a universal global bank tax

Finance Minister Pranab Mukherjee on Saturday urged G20 countries not to roll back stimulus measures at one go as it could derail the fragile economic recovery.

Ministers from the Group of 20 countries were reviewing the progress on a string of initiatives agreed last year to make the financial system safer and protect taxpayers from having to pay for bank rescues again.

Speaking on the concluding day of the meet, Mukherjee said the market was sending strong signals that the situation was still a matter of concern and only countries that had fiscal compulsions should head for a rollback.

“While we should not rush to fiscal exit at the same time so as not to undermine the recovery, especially since the monetary policy instrument is not very effective on account of continuing instability in financial markets, those countries that have market compulsions may need to start the consolidation now,” Mukherjee said at the G20 finance ministers’ meeting in Busan, South Korea.

He said while other countries could stagger in fiscal consolidation, it was critical to clearly lay down credible and transparent fiscal consolidation paths. He cautioned that countries should exit from stimulus measures before the markets start forcing them on account of deterioration in fiscal conditions.

“And, we need to act before the market forces us to do so. I may point out that fiscal deterioration is a natural corollary of deep and protracted recessions and downturns as governments try to stimulate the economy back to their true potential. This entails ceding some control to markets that have to fund the high deficits.”

Mukherjee said monetary policy tools was not very effective on account of continuing instability in financial markets and underlined the need of structural reforms to raise global economic growth.

“Even as we were deliberating the framework and the global economic recovery was getting a foothold, we now seem to see the beginnings of another crisis. This underscores the importance of urgently addressing various imbalances that exist in our economies, both external and internal,” he said.

He also called for investment in human resource development and infrastructure in developing countries so that they could become new nodes of sustainable high growth. “While growth will be central to poverty alleviation, this will not be enough... We need to analyse how resources will be made available,” he added.

Meanwhile, the world’s top economies also decided to scrap the plans for a universal global bank tax, giving countries plenty of wiggle room over how to make banks pay for their bailouts in future.

Attempts to introduce a global bank levy were finally ditched in the face of opposition from Japan, Canada and Brazil whose banks needed no public aid during the worst financial crisis since the 1930s.

“There is no agreement to proceed with an ex ante bank tax,” said Canadian Finance Minister Jim Flaherty.

The G20 said it recognised there was a range of policy approaches and that it will approve a set of principles later this month in Toronto on how to protect taxpayers.

However, British Finance Minister George Osborne reiterated his pledge to introduce a UK bank tax regardless of what other countries do and will spell out his plans in a budget report on June 22. “Different countries will do different things but to have it under the umbrella of the G20 is going to be helpful,” said Osborne.

BASICS AT BUSAN

> India bats for gradual roll-back of stimulus, but cautions that market should not force countries to act

> Recognises the need to lay down credible, transparent fiscal consolidation paths

> Scraps plans for a global bank levy

> Plans for tough new Basel III bank capital and liquidity rules by end of 2012

Basel backing
Although the meeting did not agree on any new regulation or alter deadlines for implementing steps agreed last year, ministers sought to keep plans for tough new Basel III bank capital and liquidity rules on course for implementation by the end of 2012 despite deep-seated concerns among several countries.

“We are on track to deliver the proposals at the Seoul summit in November. Ministers are fully engaged in finding the right compromises,” Financial Stability Board Chairman Mario Draghi told reporters.