India for bigger SDR boost; ECB disagrees

While India has pitched for tripling the International Monetary Fund's equity to SDR 650 billion (about $975 billion), a top European economist has criticised the move to raise Special Drawing Rights as poorly thought out and inflationary.

At the recent G-20 summit in London, India pleaded for a 200-per cent increase in the quota size of the IMF to empower the multilateral funding agency to play an effective role in pulling the global economy out of the current crisis, which is likely to be prolonged.

It argued that the current resources of the Fund were inadequate to meet the demands of the world economy in the wake of the financial crisis,. The total size of the IMF quotas is SDR 217 billion, in which India's share is SDR 4.16 billion.

Prime Minister Manmohan Singh had said after the G-20 Summit in London, "India does not need IMF funding but we have been in favour of expanding IMF resources as this will help developing countries that need assistance. It will restore confidence about emerging markets." India also underlined the need for an early conclusion of the IMF quota review even before 2011, in addition to endorsing a target quota increase by 200 per cent.

'Helicopter money'
However, European Central Bank executive board member and chief economist Juergen Stark on Tuesday criticised the decision made at the G20 summit to boost the IMF's SDRs, saying it could spark inflationary problems by creating "helicopter money".

Last week leaders from the Group of 20 wealthy and emerging economies agreed to support a general allocation of $250 billion worth of SDRs alongside other measures to boost the Fund's effectiveness.

Under the plans, countries hit particularly hard by the global economic crisis would be allowed to increase their SDR share by using those of other countries which may not need them.

The results of the G20 summit have been broadly welcomed by policymakers, including the ECB's President Jean-Claude Trichet. But Stark questioned whether this decision was needed and had been properly thought through.

"That is pure money creation. That is helicopter money for the globe," he told German business daily Handelsblatt in comments later confirmed by the ECB. "There was no examination of whether there is a global need for additional liquidity at all ... one used to take a lot of time to examine something like this," he said.

"Helicopter money" has become a phrase linked to pumping money into the economy as an extreme response to the threat of deflation. In 2002 Ben Bernanke, then a Federal Reserve governor and now its chairman, gained the nickname "Helicopter Ben" after he quoted an argument by US monetarist economist Milton Friedman that money should be dropped from helicopters if an economy slid into deflation.

Germany, historically the most wary on inflation, has been critical of moves to increase the global money supply. Many German economists fear that it will lead to higher inflation once the global financial crisis has passed.

In addition, the German government has been resisting pressure from the US and other European nations for additional stimulus spending.