India?s executive director at the IMF Arvind Virmani has cautioned against any halt on the country?s policy reform on oil and energy. He has urged corporate India to be prepared to handle situations that could arise from some degree of volatility in capital flows. Companies should not be taken by surprise if the inevitable fluctuations in capital flows cause exchange rate variations or restrict the availability of short-term finance. Given the global economic conditions, there could be shocks, although with an intensity less than what was experienced in 2008, and the unprepared might not find succour from anywhere, he warned.
In an interview to FE, Virmani, who was chief economic advisor in the finance ministry, vehemently argued for the ?right structure of incentives? (through tax and expenditure policies) to affect the long-term trend pressure on the global prices of certain commodities that are ?energy elements.?
He said it would be ?perfectly justified? if India emulates the Chinese model when it comes to inducing energy giants to set up local manufacturing bases. China has successfully used its status as a large volume producer/market to coax the likes of Siemens and GE to set up units in the country. Now that India is augmenting its power generation capacity like never before, it could reasonably ask China that has gained huge export capabilities by replicating the technologies of foreign manufacturers on its soil, for a similar arrangement. This would indeed be legitimate as anyway there isn?t real competition in the market for these goods which are largely a public sector preserve, he said.
While oil accounts for 33% of India’s import basket, there is also bound to be a sustained momentum in other growth-linked imports into India, even as exports would remain constrained by the slow growth in world trade, he said.
The price pressures on the oil and other commodities that belong to ?relatively uncompetitive markets? could push up India’s current account deficit. While India’s policymakers see this deficit at a historic high of more than 3% of GDP this fiscal year, there have been more alarming predictions by the likes of Goldman Sachs, which estimated the deficit to widen to 4% this year and further to 4.3% in 2011-12. Last year, India’s current account deficit stood at 2.9%. Virmani does not subscribe to such scare-mongering, but underscored the need for intelligent management of the situation. ?The growth differential (between India and other large economies) would ensure that capital inflows are enough (to bridge the current account deficit,? he said. ?One should expect some volatility in capital inflows. (volatility) is a historic reality,? he said.
Even though 2007 commodity price bubble was burst, there’s a burgeoning permanent trend pressure on prices of many commodities. India, being a fast-growing emerging economy with growing level of growth-inducing import intensity, ought to expeditiously tackle the situation through a slew of policies, Virmani said. There is a need to keep reforming the policy structure related to oil and energy. Petrol price decontrol and the hike in prices of other oil products were right moves. So was the CIL IPO, as it could eventually lead to introduction of competitive elements. But the reform process has to continue, in a calibrated but fast enough manner, he stressed. Also important is rectifying the problems with respect to solar energy policy. ?It is imperative that we don’ keep raising the level of import (bill) of these commodities (which experience price pressures),? Virmani said.