IMF warns of inflation, cooling economy as Chidambaram arrives

April 12th, 2008 - 11:45 am ICT by admin  

A file-photo of P. Chidambaram
By Arun Kumar
Washington, April 12 (IANS) As India’s Finance Minister P. Chidambaram arrived here, the International Monetary Fund (IMF) said that inflation is becoming a big issue in India as its economy is cooling with lower investment bringing down growth to just a little below eight percent. While the exposure of Asian financial institutions to structured products, and the sub-prime market in particular, is low, the region has not been immune to the turbulence in global financial markets, David Burton, director of the IMF Asia and Pacific Department told reporters Friday.

There are no signs as yet of any significant credit squeeze in the region, but equity markets are down substantially, he said in a briefing on the Regional Economic Outlook for Asia and the Pacific ahead of the World Bank-IMF Spring Meetings here over the weekend.

“And that has had implications for the ability of corporates to raise capital through IPOs (initial public offers), notably in India, and credit spreads for banks and corporates have increased significantly,” he said.

Chidambaram arrived here Friday to join world finance ministers and central bank governors in a discussion on the outlook for the global economy at the meetings. Doha round of world trade talks and climate change are also on the agenda.

“At the same time as we’re seeing signs that growth is starting to slow, inflation is rising significantly across the region, said Burton noting “core inflation is starting to pick up, quite significantly in a number of countries such as Indonesia, India, and Vietnam.”

“We also see India’s economy as cooling this year, particularly as lower investment brings down growth a bit and we see that coming down right now to just a little bit below eight percent,” he said.

“Inflation is a big issue. It is 7.5 percent,” said Kalpana Kochhar, senior adviser. “This may not seem very high, but politically it is a hot issue” as it’s mainly due to rising prices of food, fuel, and some due to metals.

“The other thing is, activity has come off at a very fast pace, but it is still pretty strong,” she said. “So, there is a real question about dealing with inflation, even though it seems to be mostly supply driven, before it becomes entrenched in expectations, and spills over into the second-round effects.”

“The stock market too has come off, but there are still capital inflows because there is a growth story there. And so the challenge of managing capital inflows, while it doesn’t seem to be as huge an issue as it was a year ago, still continues,” Kochar said.

Exchange rate flexibility, allowing the exchange rate to appreciate a little, to take pressure off imported inflation, but also to help corporate capital inflows, and the fiscal situation remain an issue, she said, “but the immediate issue is inflation, coping with it”.

Asked to comment on the implications of the rupee-dollar exchange rate fluctuations, Kochar noted that after a fairly sharp appreciation last year, the rupee has remained stable against the dollar.

“In the medium term, productivity differentials between India and the rest of the world would suggest that capital inflows would continue, perhaps not at the level that we saw in the middle of last year, so that would argue that there would be a tendency for the exchange rate to strengthen over time,” she said.

The rupee may have moved quite a lot against the dollar in the past year, albeit most of it in a spurt about a year ago, but in effective terms it has probably moved a lot less, added Burton.

“If you worry about competitiveness of exports generally, then if you look at it in effective terms, you realise that it is less of a worry than you might think,” he said.

Apart from inflation that deserves some attention immediately, there is also an important ongoing structural reform agenda that needs to be advanced in India, Burton said.

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