Caution on US, EU saves the day for emerging economies: Desai

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Monetary authorities’ conservative stance on taking exposure in the stressed financial assets of the US and Europe during and after the economic turmoil have saved the day for emerging economies like India.

This was the consensus amongst Columbia University professor and director of Centre for Transition Economics Padma Desai and chairman of prime minister’s economic advisory council C Rangarajan.

Speaking at a meeting held to commemorate 30 years of India’s Exim Bank, both Padma Desai and Rangarajan maintained that central banks in emerging economies like India were right in approaching cautiously while allowing their banks and financial institutions to pick up ‘stressed’ assets in US and Europe.

The duo also favoured right balance between financial innovation in advanced products as seen in US markets and financial regulation for their orderly development.

Desai said that opening up Indian economy to foreign direct investment (FDI) was “important for the country’s growth and improve productivity”.

The Columbia University professor does not think that Chinese currency, renminbi, will be the reserve currency along with US greenback to conduct financial transactions globally.

“I do not think so. It may not become the reserve currency unless it is freely convertible. It is long way off for global financial community to accept renminbi as reserve currency internationally,” Desai told a gathering of financial professionals, policymakers and intellectuals held by Exim Bank.

Desai attributed the collapse of US financial markets to pressure and interference from the US president and Congress on monetary authorities to drive down the home loan rates, lack of proper regulatory oversight by financial regulators and Federal Reserve not scrutinising the fancy financial instruments.

The three factors, Desai said, led to collapse of 14 large banks and financial institutions in the US and thereby the entire American economy. She cited the $760 billion bailout package put together by US government, Federal Reserve and buying up over 70 per cent equity in largest insurer AIG to rescue the economy from turmoil. She said European Union problem was more pronounced and it would take at least 3-5 years before normalcy could be restored.

Desai maintained that top leadership of EU, European Monetary Union (EMU), European Central Bank (ECB) and financial authorities were still engaged in an intense dialogue on future course of action for member-countries.

As direct fallout of US and EU turmoil, several countries across Latin America, Asia and Africa have been impacted with their macro-economic balance going awry. She referred to Russia taken a hit with growth declining by 17 per cent while India and China continued to top the GDP charts despite the 2008 and 2010 economic turmoil that originated from US.

With looming fiscal deficit of over 5 per cent, countries like India cannot afford to ‘throw cash’ on schemes that are meant to subsidise those in rural areas. Both Desai and Rangarajan were of the view that only way to deal with such turmoil was to tighten prudential norms governing the financial institutions having ‘systemic impact’ and get the right balance in financial regulation.

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