International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn today commended India's role in managing capital inflows, which have already crossed $50 billion this year--about 4 per cent of the country's Gross Domestic Product (GDP).
During a meeting with Finance Minister Pranab Mukherjee, Kahn showed confidence in India's handling of these. Later in the day, addressing members of industry chamber Ficci, he said India was following the right approach to the inflows, which had supported the economic growth. He, however, cautioned that growth here was creating tensions or the risk of a bubble. India must use the very high level of growth and big revenues to partly go back on track on the fiscal side and rebuild buffers.
"India has never taken massive intervention nor decided to strengthen its capital controls. So, in my view, the Indian approach is rightÂ… I am confident India has a very strong track record of vigilance. Capital flows can be put to good use without sacrificing their economic stability," Kahn said.
At the G-20 summit last month, Prime Minister Manmohan Singh had said: "Even as we try to avoid destabilising the surge of volatile capital flows to developing countries, there is a strong case for supporting long-term flows to these countries to stimulate investment, especially in infrastructure."
Quoting this statement, Kahn said that exactly was the right thing to do. He said capital flows were beneficial for the economy if they were driven by growth prospects, but, when driven by short cyclical factors, these might be very disruptive.
"But, of course, the other side of the coin is that capital inflows can bring political challenges when they come too fast or when they have some disruptive trends or when they create asset price bubble. So, financial stability must be valued carefully in the place of such incidences," he cautioned.
India needs foreign inflows to bridge its current account deficit, which may expand to 3 per cent of GDP at the end of March 2011. Policymakers and top economists have said there is no need to put in checks at the moment, as the country can easily absorb flows over $70 billion and finance the gap.
The Reserve Bank of India has said it will intervene when inflows turn volatile. In India, capital flows have topped domestic savings and, when the country is looking at $1 trillion investment in infrastructure in the 12th Five-Year Plan (2012-17), foreign capital may prove useful.
Kahn also opposed the idea of a Tobin tax, proposed by Nobel Laureate, James Tobin, on short-term cross-border currency conversions. "I am not a fan of the Tobin tax... Tobin tax does not fit into the idea of an economy today," he added.
At a press conference in the evening, he said India was becoming one of the biggest economic powers in the world and was among the top 10 shareholders of IMF.
"The growth in India is higher than expected. It is expected to be high, close to 9 per cent. But there are some tensions on the inflation side and the current account. But nothing to worry, it is normal for an economy that is growing so fast. The government is clearly aware of this and managing it well. The main challenge is now using the fruits by reducing public debt. The international crisis taught us this lesson to be financially strong," Kahn said.
During his one-day visit, Kahn met the prime minister, the finance minister and other senior government officials, and discussed a range of issues, including India's economic growth and steps India had initiated on infrastructure and fiscal consolidation to further boost the growth momentum.
"We also discussed the importance of international cooperation, particularly in the context of the G-20 process, to build and sustain a strong global recovery," Strauss said.
During his meeting with Kahn, Mukherjee stressed India would play its role in G-20 and support the process of policy cooperation in addressing external and developmental imbalances. In this regard, he reiterated India's view that global savings needed to be recycled to address development imbalances as part of the world community addressing global imbalances.
