The Hindu Business Line : `India less vulnerable to global imbalances'

Insulated economy
India does not depend on the international capital market for financing the fiscal deficit
Current account surplus has been a minor source of reserve accretion

Hyderabad , May 4

The global payment imbalances would not impact the Indian economy much, the Union Finance Minister, Mr P. Chidambaram, asserted today at the 39th annual meeting of the Asian Development Bank (ADB).

In case the world economy slows down, India is likely to be less vulnerable since its growth story is driven by domestic demand in contrast to other fast growing Asian economies, which are mainly driven by external demand.

"It needs to be noted that India does not depend on the international capital market for financing the fiscal deficit," Mr Chidambaram said, while addressing the ADB Governors' seminar on `A Shared Responsibility: Fixing Global Payments Imbalances' here on Thursday.

Spillover effect seen

However, he admitted that the fiscal position of the Indian Government could be indirectly impacted.

"There could also be a spill over effect of global developments on domestic interest rates. It could also pose challenges for reserve management as currency values may fluctuate violently."

Similarly, the Finance Minister said, any abrupt adjustment in global imbalances might affect the Indian corporates, banks and households. The impact, however, could be less than some other Asian economies.

Corporates that have borrowed at variable rates could suffer more compared to those that have taken loans on a fixed rate basis. Corporates that have hedged against currency and interest rate risks might escape the adverse effects, he said.

Although banks in India have their deposit base predominantly in rupees and their investments in foreign currency stocks were not large, they have been financing investment in assets, home loans and the retail market as well as equities. "Like many EMEs (emerging market economies), asset prices have risen sharply in India too. Should there be a reversal of capital flows, asset prices will decline sharply exposing banks to credit risk," Mr Chidambaram said.

India's role minimal

Referring to the macroeconomic indicator that contributes towards global imbalances, he said the role of India in perpetuating the global imbalance was minimal, not only in the present circumstances but also in near future. Going by the current indication and the projections of the tenth Five Year Plan, India's current account position was likely to remain in the deficit in near future.

According to Mr Chidambaram, "It is observed that generally current account surplus accounted for a considerable proportion of reserve accumulation in most of the Asian EMEs and Japan during 2000-05. For India, current account surplus has been a minor source of reserve accretion. In our case, capital flows, as opposed to current account surpluses, played an increasingly important role in the accumulation of reserves."

Stating that India has been following policies that were supportive of `orderly adjustments in the global imbalances', the Finance Minister said there was "no reason to expect any change in the basic framework of our policies, which have served us well both in terms of growth based on efficient use of capital and stability assured by sound macroeconomic policies."

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