G20 leaders agree to cut deficits, not stimulus

Leaders of the G20 group of nations today decided against immediate withdrawal of economic stimulus, strongly pushed for by India, to preserve the "fragile" global recovery, while agreeing that countries should themselves decide on the contentious financial levies.

Meeting against the backdrop of Eurozone crisis arising from government debts, which was compounded by the 2008 financial crisis, the Summit struck a balance by allowing advanced economies to adopt fiscal plans to at least halve deficits by 2013 and gradual unwinding of stimulus.

It will also help stabilise or reduce government debt-to-GDP ratio.

Reflecting India's concerns, articulated by prime minister  Manmohan Singh that any immediate exit from stimulus could lead to double-dip depression, the Toronto Declaration said: "To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand.

"At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances."

India itself has initiated gradual rollback of stimulus unveiled in the wake of the 2008 crisis triggered by the fall of large US banks, but any sudden withdrawal of stimulus by developed nations would hit exports of developing nations.

"Those countries with serious fiscal challenges need to accelerate the Pace of consolidation.  This should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path," the Declaration said.

While European majors like France, Germany and Britain campaign for immediate cut back in spending to rein deficits, an euphemism for exit from the stimulus, the US and countries like India opposed such a quick termination saying there was still need for a stable recovery.

The other major contentious issue was the proposal for a bank tax to serve as a bulwark against future crisis of the type that triggered collapse of the financial institutions in 2008.

The Summit adopted a flexible approach leaving it to the individual countries to chose their path.

"We agree the range of approaches would follow these principles: protect taxpayers; reduce risk from financial systems; take into account individual countries circumstances and options and help promote a level playing field," the G20 document said.

While countries like Britain, which has already levied a tax, France and Germany campaigned for such a tax, nations like India have reservations.

India pointed out that its banking institutions were conservative by nature and followed healthy norms that prevented any crisis in the country in 2008.

"We agreed the financial sector should make a fair and substantial contribution towards paying for any burdens associated with government interventions, where they occur, to repair the financial system or fund resolution, and reduce risks from the financial system.

"We recognised that there are a range of policy approaches to this end.  Some countries are pursuing a financial levy. Other countries are pursuing different approaches," the Declaration said taking on board India's approach that individual countries should be given the choice to decide whether to have a tax  on banks or not not.

Finance secretary Ashok Chawla told Indian journalists that the prime minister's main position on the global economic situation were vindicated by the fact that the G20 agreed that growth should not not be stifled as it was still fragile and it was harmful to developing countries.

"It was pushed through in the communique where the tilt is towards growth," he said.

Reforms of the international financial institutions was another issue on which India was focussed. This included the enlargement of quotas in the International Monetary Fund and there would be countries who are enjoying the quota who would oppose its dilution.

He said the deadline for this has been advanced to November when the G20 meets in Seoul from the original plan of January next year.

On trade, there was a general feeling that the countries must get to an agreement in multilateral fora like the Doha Development Round of the WTO, a point made by the Prime Minister in his speech. He also favoured rule-based global trading system without resorting to protectionism.

The Summit Declaration, in a para on 'The Framework for Strong, Sustainable and Balance Growth,' said G20's highest priority was to safeguard and strengthen the recovery and lay the foundation for strong, sustainable and balanced growth and strengthen financial systems against risk.

"We, therefore, welcome the action taken and commitments made by a number of G-20 countries to boost demand and rebalance growth, strengthen public finances and make our financial systems stronger and more transparent.

"These measures represent substantial contributions to our collective well-being and build on previous actions. We will continue to cooperate and undertake appropriate actions to bolster economic growth and foster a strong and lasting recovery," it said.

The Framework said the nations were committed to taking concrete actions to sustain the recovery, create jobs and to achieve stronger, more sustainable and more balanced growth. "These will be differentiated and tailored to national circumstances."

The Summit felt that there was a risk that synchronised fiscal adjustment across several major economies could adversely impact the recovery.

"There is also a risk that the failure to implement consolidation, where necessary, would undermine confidence and hamper growth. Reflecting this balance, advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debt-to-GDP ratio," the Summit Declaration said.

On financial sector reforms, the Summit said it was building a more resilient financial system that served the needs of the economies, limits the build up of systemic risk and supports stable economic growth.

"We have strengthened the global financial system by fortifying the prudential oversight, improving risk management, promoting transparency and reinforcing international cooperation," it said.