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India needs to tighten monetary policy, says IMF

The impact of surging food and fuel prices being felt globally is "not so big" in India but it needs to tighten its monetary policy, says IMF.
PTI | By Sridhar Krishnaswami, Washington
UPDATED ON JUL 02, 2008 11:19 AM IST

The impact of surging food and fuel prices being felt globally is "not so big" in India but it needs to tighten its monetary policy, the IMF has said as it warned that some countries will not be able to feed their people and maintain economic stability if the hike continues.

"Some countries are at a tipping point," said International Monetary Fund Managing Director Dominique Strauss-Kahn at the release of a new IMF study which says the effect of price hike is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation and worsening poverty.

"If food prices rise further and oil prices stay the same, some governments will no longer be able to feed their people and at the same time maintain stability in their economies," he said.

Kahn said such countries needed help from the international community for good policy options. "Their challenge is ours. It is to ensure adequate food supplies while preserving the poverty-reducing benefits derived in recent years from faster growth, low inflation, and better budget and balance of payments positions," he added.

But a senior official of the IMF told PTI that although India has not been flagged in the latest report because of many "mitigating factors", the broad general policy implications apply.

"India is a large country and it has USD 312 billions in reserves. The fact that you had a near doubling of oil prices over a period of year is going to impact the current account and you are seeing it," said Kalpana Kochhar, Senior Advisor in the Asia Pacific Department of the Fund.

"You would not have seen Indian highlighted.... The impacts are big but not so big. There are positive inflows and the results are still large," she said.

"The reason why India is not highlighted in these studies is that you have many, many mitigating factors. On the trade account you have the deficit but on the services you are doing very well," Kochhar said.

She acknowledged that FIIs were pulling out of the country but said it has to be looked from the global prospective.

"The capital account remains in surplus... You hear stories of FIIs pulling out. Yes,they are pulling out but you have to put that pullout in perspective. It is happening in a number of countries.... So when I see equity investors pulling out of India, I don't necessarily have the same view as others have.. This is a part of a global phenomenon," Kochhar said.

"But the broad general policy implications apply to India as well-- they have to do with tightening monetary policy; not having generalised subsidies that are too expensive for the fiscal side," the senior IMF official said.

The IMF study showed that higher food prices have cost a group of 33 poor net food importers USD 2.3 billion, or 0.5 per cent of 2007 annual GDP, since January 2007.

In the same period, the effect of rising oil prices on 59 low-income net oil importers was USD 35.8 billion, or 2.2 per cent of their GDP.

Annual food price inflation for 120 low-income and emerging market countries rose to 12 per cent at the end of March 2008 from 10 per cent three months earlier, while fuel prices accelerated to nine per cent from 6.7 per cent in the same period.

Preliminary data indicate the problem is worsening and that poor countries that are highly dependent on food imports are particularly vulnerable to rising food prices.

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