According to Indian sources, India along with China, Brazil, South Africa and Indonesia are identified by the OECD as the five enhanced engagement countries meaning that they will be considered for permanent membership in future provided they pass the rigorous reviews of the OECD committees in terms of the economic policies and its implementation. India's performance in terms of transparency, openness and competition is still short of the rigorous standard set by OECD for sending invitation for full membership and so the official invitation has still not been sent to India for membership.

Indian Government sources say that there is no hurry on behalf of India for this membership since India is not going to get any additional advantage in the present global financial conditions. On the contrary, the OECD has got rigid rules on investment and competition policy which at this stage may not suit the Indian policymaking. India has its own accession road map and there is no incentive for India to prepone some of the measures implementation for seeking invitation early.

OECD in its report on India released in December last year mentioned that except for sectors like electricity and transport, the restrictions on foreign investment were very high in India compared to the OECD countries. The OECD report urged greater reforms in competition policy by recommending the privatisation programme and relaxing restrictions on foreign investment. India has its own roadmap taking into account the political ground reality and the Government will follow that even if that is far below the standard set by the OECD for permanent membership.

OECD it its latest report has argued that the Reserve Bank of India's (RBI's) process of raising policy interest rates is “still very low by historical standards”. The report warned: “With inflation remaining elevated and the recovery appearing to have taken root, there is a risk that price increases for inputs will flow through to second-round increases and that inflationary expectations will become destabilised. To mitigate this risk, sizeable further monetary tightening will be required through 2010 and into 2011.”

OECD projected the inflation rate to be 7.7 per cent in 2010 and 6.1 per cent in 2011. It expected the consumer price index rise to be at 10.2 per cent in 2010 and still hovering at 6.3 per cent in 2011. The trade deficit has been projected at $80 billion (imports of $405 billion) in 2010 and going up to $101 billion (imports of $478 billion up 13.1 per cent from 2010) in 2011 and real GDP growth in 2010 at 8.3 per cent and at 8.5 per cent in 2011.

According to OECD Chief Economist Pier Carlo Padoan, the outlook for inflation remains the main downside risk, especially if monsoonal rainfall is again deficient. In that case, food inflation would likely begin to risk anew. More generally, the strong state of domestic demand could lead to persistently higher inflation and an upward drift in inflationary expectations.

The expected rebound in agricultural production is likely to bring about a continued moderation of food inflation in the short run. However, given the relatively modest slowdown of the Indian economy during the global recession, excess capacity is limited and demand pressures are on the rise, providing firms seeking higher profit margins to raise produce. Higher excise duties on petrol and diesel will also contribute to higher inflation at the margin. Taking these factors together, inflation is likely to remain stubbornly high, he observed.

Addressing RBI, Padoan suggested the situation “would necessitate a strong policy response from RBI, which would weigh heavily on sentiment and activity. With the budget deficit expected to remain large over the projected period, government borrowing requirements may also exert upward pressure on companies' borrowing costs”.

Adding the context of anticipated deficit reduction being underpinned on “expected revenue growth, asset sales and some more modest tax measures”, Padoan said “the expected rebound in agricultural activity should help limit further increase in food prices, which have been a major contributor to high inflation. However, underlying inflationary pressures are likely to persist given the strong outlook for demand. Timely policy action to limit the scope for second-round price increases is, therefore, required. Monetary policy normalisation is also important in the light of relatively modest fiscal consolidation”. (IPA Service)