India for global efforts to control inflation: FM

Warning that volatility in international food and fuel prices may be on the way to becoming a long term and global phenomenon, India on Thursday called for a coordinated effort at the global level to control inflation.

Recent volatility in global prices of food and fuel has thrown up fresh challenges in management of inflation, Finance Minister Pranab Mukherjee said, adding, "... Management of inflation, in addition to domestic efforts, will increasingly have to be a globally coordinated effort."

Mukherjee was speaking at a session on managing inflation and capital flows at the Governors' Roundtable of the Asian Development Board's annual meeting in Hanoi.

He, however, blamed the policies of advanced economies of loose monetary conditions to fight deflationary trends and foster a recovery for leading to volatile capital flows and partly contributing to volatility in commodity prices.

"Today, the entire globe is facing simultaneous volatility in food, fuel prices and commodity prices. Thus, over the last four years, we have moved from a fuel crisis to a food crisis to a financial and economic crisis and now, we are back to a food and fuel price crisis," he said.

India is grappling with high food inflation, which was hovering around 8.5 per cent for the week ended April 23 and the Reserve Bank of India has tightened the monetary policy to contain inflation even at the cost of economic growth.

"We need to look closely at contribution of different factors to food price volatility and inflation in order to understand and respond through policy reform," Mukherjee said.

He said a significant part of inflation is due to imbalances and inadequacies in global financial and monetary management.

The minister said one set of policies needs to address issues such as excessive liquidity and speculation and another set of policies needs to address other issues such as panic buying and exchange rate fluctuations.

On capital flows, Mukherjee said there has been steady revival of capital flows to India in 2009-10 and this trend continued in 2010-11 due to its strong economic fundamentals.

"However, easy monetary policy in terms of very low interest rates and quantitative easing in advanced economies have led to an increase in liquidity and lowering of long term interest rates. These are also driving capital to emerging economies in search of higher yields," he said.

Mukherjee said capital flows have exhibited considerable volatility, imparting macroeconomic instability in the event of sudden stops and reversals, eroding competitiveness and complicating the setting of policies.

"I believe that policy prescriptions with respect to capital flows should be even-handed," he said.

He said 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 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," Mukherjee said.

India uses a mix of policy tools to manage capital flows, mainly relying on prudent capital account management and flexible exchange rates, with "good" actual use of inflows.