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‘Govt not looking at inflow caps now’

‘Govt not looking at inflow caps now’
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First Published: Tue, Nov 24 2009. 04 14 PM IST
Updated: Tue, Nov 24 2009. 04 14 PM IST
New Delhi: India can absorb nearly $100 billion of dollars in capital inflows, nearly double what is expected this year, before it needs to take strong restrictive measures, one of the prime minister’s top advisers said on Tuesday.
Economic growth was picking up, and should hit 7 to 8% in the fiscal year starting March 2010, said C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, adding the biggest worry over the next few months was rising inflation.
“At the moment I don’t see any strong measures to control capital inflows,” Rangarajan said in an interview for the Reuters India Investment Summit. “But if the flows become very strong, then we could take some action to restrict some of the inflows.”
“If it touches close to $100 billion, then that is the time when we really need to act. But at the moment I think that all the indications are that the total capital flows during the current year would be $57-$60 billion, and that is manageable.”
He said inflows were $108 billion in 2007-08, when India had previously taken steps to limit capital inflows.
Any initial curbs would be on speculative funds in sectors such as real estate and borrowing abroad to spend at home.
“I would really say that the restrictions may be imposed only on those capital flows which are considered to be speculative, added Rangarajan, one of Prime Minister Manmohan Singh’s closest advisers.
Brazil and Taiwan have taken steps to curb hot money inflows, and other governments are keeping a watchful eye on inflows, wary that they could fuel asset price bubbles.
Economists have said India may need to impose restrictions on capital flows at some point to head off volatility in the stock and commodity markets.
“I think the restrictions could be in terms of some informal limit of external commercial borrowing,” Rangarajan said. “If there is a capital inflow into the country in some of the sectors like real estate or something like that, then some controls can be imposed on that.”
The IMF’s chief economist on Monday warned of bubbles in emerging markets on uncontrolable capital movements, which was echoed by the Asian Development Bank on Tuesday.
The Indian rupee has risen 12% from a record low in early March, driven by capital inflows and leading to worries it could choke off export growth needed to help bring India out of an economic slowdown.
“The rupee has appreciated to some extent because it has also depreciated very much earlier,” Rangarajan said, adding the dollar’s weakness was also a factor.
“So far the appreciation has been of the order that it is not a cause for concern.”
High food prices the major worry
Rangarajan said the major economic worry was inflation, which he expected to be around 6.5% at the end of the fiscal year. He said the India needed to aim for 4.0% inflation or less to be compatible with other economies.
Policymakers face a tightrope between controlling inflation and ensuring that any fiscal or monetary tightening does not choke off economic recovery.
“In the immediate next few months, the biggest worry is inflation, and more particularly the increase in food prices,” he said, adding it remained to be seen if there would be the usual season decline in food prices in November and December.
“But if the food prices continue to rise, and show signs of a strong rise, then monetary action may be expected earlier.”
The first step was likely to be an increase in the cash reserve ratio for banks, rather than an increase in interest rates, he said. And while monetary policy could be changed, fiscal stimulus would remain in place this fiscal year.
“As far as fiscal policy is concerned, there is no question of withdrawing any of the measures before the end of March 2010.”
The adviser said the economy would grow at about 6.5% in the fiscal year that ends in March, roughly in line with last year’s 6.7% but short of the 9% or more recorded in the previous three years.
Rangarajan said he expected growth of 7-8% in 2009-10, helped by the stimulus. But the government would have to rein in a widening fiscal deficit and withdraw some spending measures.
“That degree of expansion may not be needed once the economy becomes strong and the private investment and private demand picks up,” he said.
“I do believe that the process of fiscal consolidation must begin next year ... I think we need to bring down the fiscal deficit ... probably a reduction by 1-1.5% on the fiscal deficit is warranted and it could be done.
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First Published: Tue, Nov 24 2009. 04 14 PM IST
More Topics: Capital inflow | Recovery | Growth | GDP | Inflation |