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India, China are not immune to crisis: IMF

The IMF MD also admits that the Fund had previously underestimated implications of the crisis in the US, reports Rajesh Mahapatra.
By Rajesh Mahapatra | Hindustan Times, New Delhi
UPDATED ON FEB 13, 2008 10:44 PM IST

The turmoil in the global financial system triggered by a housing loan crisis in the US is fast spilling over to the broader economy, and no country, including India, is immune to this crisis, the head of International Monetary Fund said on Wednesday.

IMF Managing Director Dominique Strauss-Kahn also admitted that the Fund had previously underestimated the implications of the crisis in the US.

“What we have seen for now, building over the past seven or eight months, is a perfect storm,” he said during a visit to New Delhi.

“Probably we didn’t warn forcefully enough… we didn’t pay much attention to interaction of financial sector with the real economy.”

Many believe the US economy, the world’s largest, is headed for a recession, which would also hurt growth in other countries. Emerging economies like China and India cannot be immune to this crisis, Strauss-Kahn said.

In the past, a one percentage-point decline in US growth had led to growth in emerging economies slowing between 0.5 to 1 percentage point, depending on trade and financial links with the United States, he said. “In India’s case, the impact could on the lower side of that band.” Still, its economy will likely grow 8.2 per cent through 2008, according to IMF forecasts, and that will help support global growth.

The current crisis began with widespread defaults in sub-prime mortgages in the US – housing loans given to borrowers with poor credit record. Initially, policymakers and experts thought it to be a problem limited to the American real estate sector, until it became known that large banks and financial institutions have taken hit of billions of dollars. Latest estimates suggest the losses could go up to $400 billion.

Governments and central banks are trying to tide over the crisis, which has sucked out liquidity from the financial system and threatens to slow economic growth. Strauss-Kahn said, while monetary authorities are working to bring the first line of defence, governments must prepare to shore up consumption through fiscal incentives.

In India’s case, he said, buoyant tax collections offered Finance Minister P. Chidambaram enough headroom to loosen some fiscal strings and boost spending so as to sustain the economy’s current momentum.

He said, however, that any fiscal measures to spur consumption must be “timely, targeted and temporary” in nature and should be opted for by only those governments that have enough headroom for such fiscal giveaways.

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