Reining in inflation without hurting growth, India's key challenge

Washington, Oct 12 (IANS) India's current challenges are to rein in inflation without hurting the growth momentum, preserve financial stability and move more vigorously on fiscal consolidation, according to Finance Minister P. Chidambaram.

'With a real GDP growth at 9 percent during 2007-08, the Indian economy continued to perform well,' he told the International Monetary and Financial Committee meeting here Saturday noting that it was the third year in succession when the Indian economy achieved a growth rate of 9 percent and above.

'Headline inflation, however, has increased significantly since early 2008, partly reflecting supply-side pressures on key agricultural commodities, increase in iron and steel prices in line with international prices, and pass-through (though partial) of international crude oil prices to domestic prices as well as continued high domestic demand,' he said.

In the absence of the minister who has cancelled his trip, his statement was read out by Reserve Bank of India (RBI) Governor D. Subbarao, who is now leading the Indian delegation at the World Bank-Fund meetings as also at the meeting of the Group of 20 major economies.

'India's balance of payments remained comfortable with the current account deficit at 1.5 percent of GDP in 2007-08, he said. 'Large net capital flows, which were significantly higher than the current account deficit, led to an accretion of foreign exchange reserves, placing continued pressure on monetary management.'

'Our current challenges are to rein in inflation without hurting the growth momentum, preserve financial stability and move more vigorously on fiscal consolidation,' Chidambram said in his constituency report.

Turning to the global financial crisis, he said in a globalising world, no country can claim to be completely unaffected. 'However, emerging market economies (EMEs) have been less affected so far by the crisis.'

'Their relative stability could be reflective of policy improvements, prudent practices, strengthened reserves, and the strong growth performance in recent years. 'But the EMEs are not islands of tranquility and the crisis could be transmitted to them through multiple channels,' he warned.

Noting that external corporate and bank borrowing is becoming scarcer and dearer and housing and real estate markets are slowing down, Chidambaram said: 'The current crisis holds important lessons for EMEs which they should factor in as they move forward on financial sector reform.'

Notwithstanding the recent softening of global food and commodity prices, we cannot afford to let down the guard on inflation, he said. 'Concerted policy efforts to minimise the operation of speculative factors in food and fuel price increases and financialisation of commodities are essential.'

The International Monetery Fund through its financing instruments should also attempt to cushion the impact on the worst affected countries and support them in adjusting to the changed global economic scenario, he said.