Tokyo: Inflation in India in the near term is expected to remain sticky, finance minister P. Chidambaram said on Saturday at the International Monetary Fund-World Bank annual meetings in Tokyo.
“Global commodity prices, particularly energy prices, pose a major risk to growth and inflation,” he added.
India’s wholesale price inflation rose to 7.55% in August from 6.87% in the previous month, while recent data showed retail inflation had come down from double-digit levels in August to a six-month low of 9.73% in September. Elevated and sticky inflation has prevented the Reserve Bank of India (RBI) from cutting its policy rate from 8% in successive monetary policy reviews.
Chidambaram said that although a major risk to global oil prices is on account of geopolitical 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 added.
The sharp rise in global food prices is another major challenge that many emerging market economies, especially those already facing inflationary pressures, may have to contend with, he said.
Chidambaram said the issues of a “fiscal cliff” and the lifting of the debt ceiling in the US need to be addressed by putting in place a medium-term fiscal plan while avoiding excessive fiscal correction in the short run. “Should the economic situation in the US worsen, its impact on emerging market economies will be much more severe than in the case of the situation in the euro area,” he added.
The finance minister said India’s current account deficit (CAD) has remained elevated during last few quarters mainly due to widening of the trade deficit, reflecting a worsening global situation. He added that with the uncertain global macroeconomic environment and slowing domestic growth, the financing of the CAD will continue to remain a challenge.
India’s current account deficit, which stood at 4.5% of the gross domestic product (GDP) in the fourth quarter (January-March) of financial year 2011-12, declined to 3.9% of GDP in the first quarter of the current financial year.
Asit Ranjan Mishra is in Tokyo on the invitation of IMF as a part of its journalism fellowship programme.