Prime Minister of India - Dr. Manmohan Singh

Remarks by PM on the International Financial Crisis at the ASEM Summit

The international financial crisis has resulted from three failures:

(a) A regulatory and supervisory failure in major developed countries;

(b) A failure in risk management in private financial institutions;

(c) A failure in market discipline mechanism

These are not my views but those of the distinguished Managing Director of the IMF, with which I agree.

We must analyse objectively how and why these failures have occurred with such ferocity. This is necessary to put in place a new set of rules which will prevent reoccurrence of such failures.

The sad truth is that in this age of globalisation we have a global economy of sorts but it is not supported by a global polity to provide effective governance.

The resulting crisis of liquidity, accumulation of bad assets, shortage of capital and collapse of confidence threatens to spill over into the real economy by way of reduced demand for goods and services particularly exports, reduced access to trade and suppliers credits superimposed on other crises - food and fuel price rises that have strained budgets and balance of payments leading to rising inflation and living costs in many developing countries.

The President of the World Bank has identified at least 30 developing countries whose balance of payments will experience a severe deterioration in the wake of this financial crisis.

The immediate task is to declog the credit markets the world over. Coordinated global action is essential to restore a measure of confidence in the credit markets.

From the standpoint of developing countries, international financial institutions, particularly the IMF and World Bank, need to put in place exogenous shock facilities to provide assistance to the affected countries more quickly and in larger amounts with less service conditionalities and greater flexibility.

Countries with strong foreign exchange positions could make additional resources available to the international financial institutions on appropriate terms to finance their operations.

As a counter cyclical device, increased infrastructure investments in developing countries, if backed by increased resources flows from multilateral financial institutions such as the IBRD and Regional Development Banks, can act as a powerful stabilizer.

The IMF should revisit the potentially powerful instrument of creating liquidity through fresh allocation of Special Drawing Rights in favour of multilateral development finance institutions.

The reform and reconstruction of the financial system has to be a collective international effort since borders no longer confine financial institutions or can keep out financial turmoil. Given the growth in cross-border investment, trade and banking in the last three decades, the world must ponder over the need for a global monitoring authority to promote global supervision and cooperation in the increasingly integrated world in which we live.

In devising a reform agenda, one must bear the wise saying of John Maynard Keynes regarding the economically damaging role of excessive speculative activity. To quote Keynes :

"Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done"

Clearly, there has been a massive failure of regulatory and supervisory powers. Speculators have had a free run for far too long a period. International institutions like the IMF have also not covered themselves with glory. There has been an unacceptable failure of effective multilateral supervision of major developed economies and in particular of what has been going on in their financial markets.

India's banking system is sound and well capitalized. It is not exposed to the type of assets which have given rise to this crisis. Our real economy will grow at the rate of 7 to 7.5 percent this year despite the global slowdown of export demand and capital inflows. We have injected fresh liquidity in the system.

We realize that we cannot remain totally unaffected when the global economy and financial system are in deep trouble. Our stock markets and the exchange rate of the rupee are under pressure due to capital outflow of foreign institutional investors. Sooner or later, the real economy is bound to experience the pain.

We are therefore sincere in our desire to cooperate and coordinate our actions with the world community to find effective and pragmatic solutions to the formidable challenges the world economy is now faced with.

Thank you.