Sustained high global oil prices and the prospect of rising interest rates threaten to cast a shadow over India’s economic boom and could destabilize the global economy, Indian prime minister Manmohan Singh warned in an exclusive interview with Emerging Markets.
A slowdown in global growth, while not imminent, will impact demand for Indian goods and could also undercut capital flows to the country, he said. “If the world economy slows down that would certainly affect the market for our goods and services and also the climate for the inflow of foreign capital,“ Singh, who will address the annual meeting Friday, said. “We have a vested interest in the sound macro management of the [international] economy.”
The prime minister also drew attention to the unresolved issue of global imbalances which, he said, casts a pall over an otherwise benign global economic climate. “The twin deficits of the US do cause a concern,” he said. “We do not have credible instrumentalities to deal with them.”
Among Singh’s chief concerns is the prospect of further monetary tightening among advanced nation central banks, including the US Federal Reserve, ECB and the Bank of Japan. Fed policy makers are next scheduled to meet on May 10, when markets widely expect another rate hike.
“If US interest rates were for example to rise sharply I think that certainly could have some adverse effects on us,” Singh said. Net portfolio equity investment in India is projected to be $8 billion this year compared with $10.5 billion in 2005. Portfolio flows dwarf FDI into the country and analysts argue that India is now more exposed to changes in investor sentiment than ever before. While Singh downplayed such concerns, he pointed out that macroeconomic factors could prove crucial: “So long as the Indian economy continues to be managed soundly and so long as macro variables remain sound, I don’t think we have to worry.”
The economist drew special attention to India’s bid to secure energy in order to maintain growth rates of 8 to 10%. “Our real challenge right now is how fast we can modernize and expand our physical infrastructure and how fast we can meet the challenge of energy security.”
The ADB said in a recent report that it would revise down India’s economic growth projection of 7.6% for this year if oil prices stay at around $75 per barrel.
Crude could rise sharply if the international community’s standoff with Iran over its nuclear programme escalates further, with many analysts predicting that prices could top $100 a barrel.
“Our needs of commercial energy are going to rise roughly at the same rate as our national income growth and we are very dependent on imported supplies of hydrocarbons,” he said. “We must take effective measures to enhance the sense of energy security.”
Singh stressed that sorting out the country’s ailing infrastructure is one of the most profound challenges facing the country, although he pointed out that new policies are now in place “for enabling public-private partnerships” for both urban and rural infrastructure.
Domestic politics and a slow moving administrative system are also often cited as hindering the country’s reform efforts. “I admit that political difference and administrative inefficiency do slow down the process of change. But I don’t share the view that democracy has acted as a constraint on our growth process,“ he said. “There are no U-turns in India.”
But, he said: “the real challenge is to have a broad based political consensus so that the processes of change are not going to hurt those who are least qualified to bear the costs of change.”
Underscoring concerns over rising oil prices, ADB president Haruhiko Kuroda yesterday hit out at oil producers for not doing enough to bring prices down below what he described as their current “unsustainable” levels by investing more in exploration and refinery capacity.