Oil price hike to hurt developing countries: FM

Finance Minister P Chidambaram today warned that a further rise in oil prices could make the oil-importing developing nations vulnerable to "growth shocks". He also said the G-8 countries seemed to be doing little to moderate the oil prices.

Addressing the Commonwealth Finance Minister's Meeting on the "World Economic Situation and Prospects" at Barbados, he said global growth during 2005 had been severely dampened by high prices of oil and commodities, less-accommodative macroeconomic policies and, cooling of the housing market in some countries.

"High and volatile global oil prices still pose a significant threat to the global economic outlook. Further increases in the prices of oil may have deeper impacts on inflationary expectations, and may result in interest rate hikes the onset of adverse supply-side effects," he said.

The minister pointed out that the International Monetary and Financial Committee Resolutions of 2004 and 2005 had called for efforts to remove disincentives to investment in oil production and refining capacity, and to promote energy efficiency and sustainability in energy. "A more effective surveillance of the impact of higher oil prices, especially on the most vulnerable economies, was also emphasised," he said.

He said the destabilising effects of high oil prices would be more damaging to the low-income oil-importing countries, since they tend to spend a large part of their income on energy requirements, and often lack access to international capital markets.

Another concern for global economic prospects during 2005 was the increasing global payments imbalances. "Divergent rates of growth, savings and investment across major regions of the world are unlikely to be self-limiting in the short run," he said, adding that a well-coordinated international macroeconomic approach would not only enhance the chances of the developing countries to consolidate their recent improvements, but would also avoid any deflationary adjustments to the global imbalances.

While the Indian economy was in a resilient mode with sustained growth in the industrial sector, moderate inflation, a buoyant capital market, comfortable foreign exchange reserves and a satisfactory monsoon, the minister said there were some concerns over possible "overheating" of the Chinese economy.