"Global commodity prices risk to India's growth"

Last Updated: Sat, Oct 13, 2012 18:52 hrs

Union Finance Minister P Chidambaram has said high global commodity prices and particularly 'energy prices' posed a major risk to India's growth and inflation.

He said despite several measures by the authorities, financial market fragilities have increased and the global economic outlook is quite worrisome.

"Growth is faltering across regions, including in emerging market economies (EMEs)," Chidambaram said while addressing the 26th Meeting of the International Monetary and Financial Committee (IMFC) here on Friday.

"Fragile financial market conditions have dented business confidence in many EMEs. Capital flows to emerging market economies remain volatile. Despite weak global recovery, global commodity prices, especially energy, have remained elevated and volatile," he said.

"Although a major risk to global oil prices is on account of geo-political tensions, large liquidity being injected by major advanced economies may also exert further pressure on oil prices.This will threaten both growth and inflation in emerging market economies," he said.

Speaking on India, the Finance Minister said: "Notwithstanding the sequential pick-up in Q1 of 2012-13, economic activity in India remained sluggish. The slowdown in growth was mainly due to sharp decelearation in industrial growth reflecting in part global uncertainties and domestic factors."

"Global commodity prices, particularly energy prices, pose a major risk to growth and inflation," Chidambaram said.

Chidambaram said in order to improve investment sentiment and put the economy on a sustainable higher growth path, the authorities took several measures in the recent period that included liberalizing Foreign Direct Invest (FDI) norms for aviation and multi-brand retail and significant pass through in fuel prices.

He said inflation rate has moderated but it still remained beyond the comfort zone of the Reserve Bank of India (RBI).

"The RBI has, therefore, kept the policy rate unchanged at 8 per cent since April 2012," he said.

"However, in order to ensure that credit flows to productive sectors of the economy, the RBI has been managing liquidity actively. In the near-term, inflation is expected to remain sticky," Chidambaram said.

He said the gross fiscal deficit of the Central Government is budgeted at 5.1 percent of Gross domestic product (GDP).

In order to contain fiscal deficit, the authorities have decided to cap the subsidies to below 2 per cent of GDP. Recently, the authorities have also raised the domestic price of administered petroleum products to contain fuel subsidies," he said.

Speaking on Current Account Deficit (CAD), he said: "India's current account deficit has remained elevated during last few quarters due mainly 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 said 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.

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