As all eyes are on the Reserve Bank of India’s (RBI) monetary stance later this month, Finance Minister P Chidambaram on Saturday said inflation is expected to remain sticky in the immediate future due to rising global commodity prices, particularly energy. Global commodity prices, he said, also posed a risk to growth.
At Fund-Bank meetings in Tokyo, Chidambaram said though the country’s GDP growth marginally improved to 5.5 per cent in the first quarter of the current financial year from 5.3 per cent in the fourth quarter of 2011-12, economic growth remained sluggish.
Besides, financing of current account deficit, which touched 3.9 per cent of GDP in the first quarter of this financial year, remained a challenge as global economic recovery remained uncertain and domestic growth slackened.
Chidambaram asked the international community to frame a medium-term fiscal correction plans, while avoiding excessive consolidation in the short run. He was referring to fiscal cliff in the United States.
He voiced opposition against diverting agricultural produce for alternative uses and emphasised the need to check excess financialisation of commodity prices.
The finance minister pitched for implementing quota reforms in the International Monetary Fund by January 2013, as scheduled. Quota reforms will slightly shift voting power in the IMF to emerging market economies.
“While inflation rate has moderated, it still remains beyond RBI’s comfort zone. In the near-term, inflation is expected to remain sticky,” he said.
Global commodity prices, particularly energy prices, he said pose a major risk to growth and inflation.
Despite weak global recovery, energy prices have remained elevated and volatile, said the finance minister. Chidambaram said although a major risk to global oil prices was on account of geo-political tensions, large liquidity being injected by some advanced economies may also exert further pressure on oil prices.
“This will threaten both growth and inflation in emerging market economies.”
The sharp rise in global food prices is another major challenge that many emerging market economies, especially those which are already facing inflationary pressures, may have to contend with.
The wholesale-price Inflation rose 7.55 per cent in August from 6.87 per cent in the previous month. The September figures are slated to be released on Monday. In September, the government raised prices of diesel by Rs 5 a litre. So, some impact of it is bound to be reflected in inflation.
The retail-price inflation, however, came down to a six-month low to 9.73 per cent in September. However, till now the retail-price inflation has not stabilised and the Reserve Bank bases its monetary stance on the wholesale-price one.
However, the central bank does track the consumer price index, as well as segmented indices on the retail price front.
Chidambaram said due to inflation being above its comfort zone, the RBI had kept the policy rate unchanged at 8 per cent since April 2012.
“However, in order to ensure that credit flows to productive sectors of the economy, RBI has been managing liquidity actively,” he added.
The Reserve Bank is slated to come out with its monetary review on October 30 and economists said that the central bank might not cut rates this time due to inflation not coming down significantly, even as growth concerned remained in the economy.
Chidambaram conceded that 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 said.
To improve investment sentiment and put the economy on a sustainable higher growth path, the
Finance Minister said the government had taken several measures in the recent period such as liberalizing FDI norms for aviation and multi-brand retail.
The recent numbers showed that industrial growth rebounded to a six-month high of 2.7 per cent in August, but a sustained rise in the trend of recovery remained a challenge since electricity generation did not expand much and low base effect would wane in the coming months.
The Finance Minister said India’s current account deficit has remained elevated during last few quarters mainly due to widening of trade deficit reflecting worsening global situation.
"However, with uncertain global macroeconomic environment and slowing domestic growth, the financing of CAD will continue to remain a challenge," he added.
India's current account deficit stood at a record 4.2 per cent of GDP in 2011-12. In the first quarter of this fiscal, CAD rose to 3.9 per cent of GDP against 3.8 per cent in the corresponding period of last fiscal. However, in absolute terms, CAD declined to $16.4 billion from $ 17.4 billion in April-June 2011.
