Monday, April 18 2005 22:17 Hrs (IST) - World Time -

Washington: India has warned that unbalanced nature of robust growth of world economy and widening current account imbalances pose serious risks and wanted appropriate strategy to be evolved to tackle it.

"There is growing consensus that adjustment of these imbalances needs to be paced and sequenced in a non-disruptive manner," Finance Minister P Chidambaram said, addressing the International Monetary and Finance (IMF) Committee meeting on Saturday (Apr 16, 2005) night.

He also said that high level of oil prices is straining the performance of many economies, particularly oil importing developing countries.

The appropriate broad strategy to address these imbalances included fiscal consolidation in US, structural reforms in the Euro area, continuing monetary stimulus in Japan and greater exchange rate flexibility in emerging Asia, he said.

"In any case the persistent risks call for a contingency plan, which will indicate possible alternatives to avert any abrupt unwinding of these imbalances," he said, adding such a plan has to be a coordinated action in consultation with G-7 and G-20 countries.

The action should address among other issues vexed questions like how much of the adjustments should be borne by interest rates and how much by exchange rates.

The answer will have to take into account the ramifications that increases in interest rates will have on growth momentum of the global economy, he said.

"We must acknowledge that in the recent past the benign interest rate regime and price stability have contributed a lot to firing the engine of growth, particularly in the developing world," Chidambaram said.

Elaborating on the surging oil prices, Chidambaram said that excessive volatility assumes riskier dimension when they are already high.

"We need to guard against market distortions," he said, adding that the burden of high oil prices has fallen disproportionately on developing countries.

To the argument that workers remittances provided stable source of financing for many developing countries, Chidambaram said that the flip side of these remittances is that they generate output and value to the country from where it originates.

In this connection, he said that activation of mode 4 of GATS of WTO, namely movement of personnel for service delivery abroad, will accelerate these flows and enhance welfare both in the country of origin as well as destination country of remittances.

He also stressed on the need to improve efficiency of the banking system and simultaneously take measures to encourage non-banking intermediaries like money changers and exchange bureaus to undertake cross-border transfer of funds at reasonable costs.

Reduction in transaction costs will facilitate larger flows through organised channels, he said, adding, 'know your customer' regulations must apply to all financial flows, domestic or international.

However, he said, "We must be wary of subjecting remittances to any extra rigour of such provisions."