High commodity prices risk to India's growth, inflation: FM

Last Updated: Sunday, October 14, 2012 - 09:00

Tokyo: Expressing concern over uncertainty in global economy, Indian Finance Minister P Chidambaram said high commodity prices, particularly energy prices, pose a major risk to the country's growth and inflation.

At the meeting of International Monetary and Financial Committee (IMFC) here on Friday, he said capital flows to emerging economies remain volatile and global commodity prices have remained elevated.

"The sharp rise in global food prices is another major challenge that many emerging economies may have to contend with," said Chidambaram, who is here to participate in the IMF-World Bank annual meet.

Talking about India, he said "global commodity prices, particularly energy prices, pose a major risk to growth and inflation".

Commodity prices are on the rise due to geo-political tensions and huge liquidity injected in financial systems by the US, Europe and Japan to stimulate their economies.

Chidambaram said inflation in India has remained above the comfort zone of the Reserve Bank and to check the demand side pressure the central bank has kept the key policy rate unchanged at 8 percent since April.

"However, in order to ensure that credit flows to productive sectors of the economy, the RBI has been managing liquidity actively. In the near-term, inflation is expected to remain sticky," he said.

India's economic growth fell to a nine-year low of 6.5 percent in 2011-12 and in the first quarter of the current fiscal, the GDP expansion stood at 5.5 percent.

In a recent report, the International Monetary Fund (IMF) has projected India's economic growth at 4.9 percent in 2012.

In the last policy review in September, the RBI had left the policy rate unchanged while reducing the Cash Reserve Ratio (CRR) by 0.25 percent to infuse Rs 17,000 crore liquidity in the system.

Following the opening up of FDI in retail and raising diesel prices, the Finance Minister said he planned more changes in capital markets, insurance, banking and infrastructure in the next few weeks.

With regard to insurance, the government is likely to take decisions providing tax incentives to make policies more attractive for investors.

Among other things, the Finance Ministry is looking at the possibility of exempting first year premium from service tax and extending the scope of tax exemption scheme to cover more life insurance policies.

In order to improve fund flow into infrastructure sector, the government may announce certain steps.

The reform measures initiated by Chidambaram after taking over as Finance Minister in August also helped the rupee rebound from a record low.

"I think the rupee must appreciate a little more," he said, adding, "it has appreciated about 5 or 6 percent in the last few weeks, but I think the rupee must find a reasonable level, its true level".

The rupee has surged more than 5 percent against the dollar in the past three months, the most among major Asian currencies.

"A further rise in the rupee will help to curb the increase in costs. The central bank cannot be expected to bear the burden of containing inflation by itself," he said.

"When fiscal policy and monetary policy act in tandem and supply improves and the rupee appreciates a little more, I think we will be able to tame inflation," he said.

With the economic growth in the first quarter of 2012-13 at 5.5 per cent, a tad higher than the previous quarter, government expects the GDP expansion in the remaining part of the year to be better.

However, Chidambaram said notwithstanding the sequential pick-up in April-June quarter of 2012-13, economic activity in India remained sluggish.

"The slowdown in growth was mainly due to sharp deceleration in industrial growth reflecting in part global uncertainties and domestic factors," he added.

To improve investment sentiment and put the economy on a sustainable higher growth path, India has taken several steps including liberalising FDI norms for aviation and multi-brand retail and reducing the subsidy outgo on diesel and LPG.

Referring to the widening current account deficit (CAD), a concern for the country, Chidambaram said:"With uncertain global macroeconomic environment and slowing domestic growth, the financing of CAD will continue to remain a challenge".

India's CAD has remained elevated during the last few quarters mainly due to large import bills on crude oil and gold.


First Published: Saturday, October 13, 2012 - 16:22

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