St. Petersburg: Prime Minister Manmohan Singh on Thursday said the threats of withdrawal of unconventional monetary policy by rich nations, such as fiscal stimulus, are hurting emerging economies hard, and the focus should on coordinated and orderly withdrawal.
Addressing the first day of the two-day G20 Summit in St. Petersburg, the prime minister also urged the developed world to desist from pursuing policies that restrict inflows of labour.
"The policy of unconventional monetary expansion in advanced countries had some success but it also had spillover effects. When policy was being loosened, there was a surge in capital flows to emerging markets, which helped some countries finance their current account deficits while generating upward pressure on the currencies of other countries," Manmohan Singh said.
"With markets now anticipating a reversal, we are seeing a large outward flow from emerging markets. Since most emerging markets now operate with flexible exchange rates, they have experienced varying degrees of currency depreciation, posing problems in many cases,” he said.
He was alluding to the talks of US Federal Reserve looking at successively reducing the fiscal stimulus that was being injected since 2008 to overcome the financial crisis.
Referring to the recent volatility in the Indian currency markets, the prime minister said it happened because the inflows of foreign funds “suddenly dried up”.
The Indian rupee has depreciated by almost 20 percent against the US dollar since the beginning of the current financial year. The currency recently hit a record low of near 69 against a dollar.
“India has been affected by currency volatility in the past few weeks. One reason for this is that we had a high current account deficit of 4.8 percent of our GDP in 2012-13. This was easily financed when flows were ample. It became a problem when flows suddenly dried up,” he said.
Manmohan Singh said the Indian government target to contain the current account deficit to 3.7 percent of gross domestic product (GDP) in the current financial year and intend to reduce it further to nearly 2.5 percent.
India’s current account deficit hit a record high of $88.2 billion, or 4.8 percent of GDP, in the financial year ended March 31. This fiscal year the government target to contain the current account deficit at $70 billion.
“We are taking steps to finance this deficit by establishing a macroeconomic environment that is seen to be friendly to stable foreign flows,” he said.
Manmohan Singh urged the rich nations not to restrict the movement of labour.
“International labour mobility in high end skills has become an important lubricant of global integration across countries. Pending the evolution of an international agreement on these issues, we must do whatever we can to avoid new restrictive measures in this area,” he said.
“A strategy for job creation in developing countries must include stronger efforts to impart employable skills to the labour force. We can learn from international experience in this area, including the experience of industrialised countries,” he said.
“We also need better functioning labour markets in both industrialised and developing countries,” the prime minister added.
Manmohan Singh said the policy of the rich nations meant to ensure financial stability should not hurt capital inflows in the developing economies.
“Regulations aimed at increasing the stability of the financial system should not operate to the disadvantage of developing countries. If we cannot moderate the volatility of total capital flows, let us at least avoid amplifying this volatility through the banking system,” he said.
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