India needs to tighten monetary policy: IMF

July 2nd, 2008 - 9:07 pm ICT by IANS  

By Arun Kumar
Washington, July 2 (IANS) India needs to tighten its monetary policy even though the impact of surging oil and food prices being felt globally is “not so big” in the country, the International Monetary Fund (IMF) has said. “Some countries really are at a tipping point,” said IMF managing director Dominique Strauss-Kahn at the release of a new study based on information and analysis by Fund economists working on 162 countries.

“If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their economies,” he said.

“They need good policy options and they need help from the international community. Their challenge is ours.”

Strauss-Kahn said the findings of the study underscored the need for a broad cooperative approach involving the countries affected, donors, and international organizations to cope with the effects of high prices.

Although India has not been flagged in the IMF report because of many “mitigating factors”, the broad general policy implications apply, a senior IMF official said.

“The impacts are big but not so big. There are positive inflows and the results are still large.”

India is a large country and it has $312 billions in reserves. But the fact that it had a near doubling of oil prices over a period of year is going to impact the current account, the official said.

The impact of rising prices is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty, the IMF study warned.

Analysing the macroeconomic policy challenges arising from the price surges, the study argues that many governments will have to adjust policies in response to the price shock while the international community will need to do its share to address this global problem.

In advanced countries higher food and fuel prices are reducing people’s living standards and making it more difficult for governments and central banks to support growth while containing inflation.

In emerging economies, and especially in some low-income countries, the stakes are even higher. For the very poor, high food prices can mean deep poverty, hunger, and malnutrition.

Key findings:

* Higher food prices have cost a group of 33 poor net food importers $2.3 billion, or 0.5 percent of 2007 annual GDP, since January 2007. In the same period, the effect of rising oil prices on 59 low-income net oil importers was $35.8 billion, or 2.2 percent of their GDP.

* Annual food price inflation for 120 low-income and emerging market countries rose to 12 percent at the end of March 2008 from 10 percent three months earlier, while fuel prices accelerated to 9 percent from 6.7 percent in the same period. Preliminary data indicate the problem is worsening.

* Poor countries that are highly dependent on food imports are particularly vulnerable to rising food prices. The share of household spending on food in emerging and developing economies typically exceeds 50 percent.

* Oil and food prices are expected to stay at high levels. Supply has been slow to respond to rising demand for commodities, which was largely the result of rapid economic growth in emerging and developing economies.

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