Finance minister Pranab Mukherjee said on Thursday said further rise in oil prices could clip around 1 percentage point off the government?s GDP forecast of 8.75-9.25% for the current fiscal year. Speaking at the annual meeting of Asian Development Bank in Hanoi, he said there was a possibility of the GDP growth coming down to 8%.
Mukherjee also said that capital controls were a legitimate tool to combat a sudden surge in capital flows and asked developed economies to share the burden of adjustment with emerging market economies.
He said inflation was projected at 7.5-8% and that the government and RBI were taking steps to manage both demand and supply issues to bring it down further. ?Despite these efforts, if the oil prices continue to exert pressure at the existing level, it will be difficult for us to manage both inflation and achieve high GDP growth merely through domestic policies.?
The Reserve Bank raised interest rates by 50 basis points on Tuesday, a bigger rise than the market had expected and the ninth increase since March 2010. Mukherjee, however, added the central bank?s tightening had mopped up excess liquidity but had not damaged growth prospects.
On capital flows, he said: ?It is now broadly accepted that there could be circumstances in which controls can be a legitimate component of the policy response to surges in capital flows.
Policymakers must therefore have the flexibility, and discretion, to adopt macroeconomic, prudential and capital account management policies. More importantly, they should be able to do so without a sense of stigma attached to particular instruments.?
?In India, we have found it useful to use a mix of policy tools in managing capital flows, mainly relying on prudent capital account management and flexible exchange rates, with good actual use of inflows,? he said, according to a finance ministry statement.
India has usually adjusted the overseas borrowing limits of companies to manage capital flows. Besides, a host of other measures, excluding much intervention in the currency market, have been deployed to tackle any sudden surge or a excessive outflows. The Indian stock market has been particularly responsive to any movement in the level of foreign capital flows.
The finance minister stressed that managing capital flows cannot be the exclusive problem of emerging markets. ?I believe that policy prescriptions with respect to capital flows should be even-handed. So far as lumpy and volatile flows are a spillover from policy choices of advanced economies, managing capital flows should not be treated as an exclusive problem of emerging market economies and the burden of adjustment should be shared,? he said.
Mukherjee said it would be difficult to have a standardised or restricted approach to manage capital flows. Each country needs to respond to these challenges depending upon its macroeconomic factors and the tools available.
