The stimulus versus austerity debate has become much more heated since last month's summit of the Group of 20 industrialised and developing nations. Political polarisation in industrialised countries has fuelled a resurgence of fiscal conservatism. On the other side, with growth weakening as the effect of stimulus wears off and with high unemployment, there are calls for more stimulus. Academics on each side are lambasting the opposing arguments as voodoo economics.

In India we follow this extremely closely and with concern. Our anxiety about an austerity drive in industrialised countries is clear. Manmohan Singh, prime minister, warned in Toronto that while concerns about debt sustainability normally suggested a need for fiscal contraction, “circumstances are not normal”. The recovery is still fragile. Contractionary policies, if followed by many industrialised countries, could provoke a double-dip recession with “very negative effects on developing countries”. He went on to say the situation calls for careful co-ordination among the G20 countries.

For developing countries the need for the G20 to co-ordinate policies is paramount but past experience is not encouraging. In 2006, the International Monetary Fund tried to get the US, Germany, Japan, Saudi Arabia and China to co-ordinate their policies to deal with the build-up of current account imbalances. As Raghuram Rajan, then IMF chief economist, writes in his book Fault Lines, each country recognised there was a problem, but each felt others must act differently, and that its own policies were just right.