WASHINGTON : World economy can bounce back if the advanced economies remove policy uncertainties, Finance Minister P Chidambaram said today, maintaining that the Indian economy has been impacted by the global growth slowdown.
In his address to the International Monetary Finance Committee here, Chidambaram said there has been marked improvement in financial market sentiment in the recent period following some significant measures announced by policymakers in the Euro area and the US.
“The global macro-economic situation is also beginning to stabilise. Although confidence has improved, it still remains fragile and the global economy continues to face several critical challenges,” he said.
“Despite all these uncertainties, the global economy can bounce back if advanced economies continuously keep progressing on removing policy uncertainties and if we are able to remove some of the major bottlenecks in the real sector of the economy,” Chidambaram said.
Addressing the annual Spring meeting of the IMF, Chidambaram said, global growth remains weak and the global economy continues to face several risks.
He said the present state of the global economy continues to pose several challenges for policymakers in advanced and emerging economies.
“Moreover, some new concerns have also arisen. As such, the global economy continues to pose huge challenges for policymakers, particularly in advanced economies,” Chidambaram said.
Although the re-balancing of the Euro area continues, recent developments in Cyprus suggest that the situation in the Euro area is far from settled, he said.
He also spoke about India’s economic situation, saying that the Indian economy was impacted by the global growth slowdown, while several domestic constraints also acted as a drag on economic activity.
“Economic activity in India remains somewhat sluggish. Given its relatively high degree of openness, the Indian economy was impacted by the global growth slowdown. At the same time, several domestic constraints also acted as a drag on economic activity,” Chidambaram said in his address.
“Although the current account deficit has been financed by increased capital flows, the government is committed to bring it down over time. Various measures taken by the government combined with recent monetary policy easing by the Reserve Bank of India are expected to revive investment activity and help take the economy to a high growth trajectory,” Chidambaram said.
Since the onset of the current global crisis, unexpected developments keep occurring periodically and add to uncertainty, he said.
It would not be overstating matters to say that the key to global stability is to restore stability to Europe, the Finance Minister pointed out.
“While Europe has to be commended for the steps it has taken so far, they may prove to be inadequate unless the major policy measures announced recently, such as the setting up of a Banking Union, are completed,” he said.
Continued fragmentation of the banking system and delay in cleaning up banks may result in continued economic weakness. There is also need to make further progress in strengthening the economic and monetary union, Chidambaram said.
Restoring growth would be the key driver to addressing the debt problem in the Euro area, the Finance Minister said.
According to Chidambaram, despite some slowdown, emerging market economies remain the strongest source of global growth, reflecting resilient domestic demand conditions and healthy banking sectors.
“Growth in emerging market economies (EMEs) is now beginning to pick up. Capital flows to these economies have increased, reflecting improved financial market conditions, but they are also a consequence of the excess liquidity in global markets and the search for higher yields,” he said.
“Consequently, policymaking in EMEs will need to continue to be vigilant to the possibility of financial instability resulting from any reversal of capital flows. Volatility in oil prices also remains a concern for EMEs,” Chidambaram said. (AGENCIES)
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