Despite the worsening situation in the Euro Zone, India is not vulnerable to sudden capital outflows.

Briefing journalists on the eve of the seventh G20 summit, the Deputy Chairman of the Planning Commission, Mr Montek Singh Ahluwalia, who is India's Sherpa at the Summit, said India has enough foreign exchange reserves to see it through even a very severe shock.

But he did admit that this time the crisis could be worse than in 2008 for two reasons.

One was that unlike in 2008, no country had the fiscal room to come to the rescue of their domestic economies to prop up growth. He added that at present, more than a crisis, it was the extreme nervousness of the financial markets that was the problem. The other reason was that although the Greek economy is small, it is the fear of contagion amongst European banks in case the Greek economy collapses. These fears, however, may have receded somewhat as the new Greek government is committed to even greater austerity and the Euro.

The attempt of the G20 at Los Cabos, Mr Ahluwalia said, would be to provide “credible assurance” to the markets that the Euro Zone governments meant business in following prudent policies. That said, G20 had no ‘silver bullet'.

The most important thing right now, he said, was to ensure that negative expectations did not gain even greater momentum. If they did, they would be harder to reverse this time than in 2008. He also said that the Euro Zone had the means to handle the crisis and would not really need any help from the IMF.

This “assurance” is likely to be the key feature of the Los Cabos Action Plan, Mr Ahluwalia said.

On India's stand at the Summit, he said that the effort would be to ensure an adequate flow of capital to the developing countries as well. So far most of the rescue packages have been aimed at the rich countries. On this, India and China were in agreement.

The great achievement of the G20 so far, Mr Ahluwalia said, has been to hold protectionism in check.

Related Topics