The recent developments around China, Iran and the Middle East have the potential to generate two types of shocks - oil price and capital flow - and India is vulnerable to both, former governor of Reserve Bank Y V Reddy said on Tuesday.
Speaking at a programme organised by the Institute for Advanced Studies in Complex Choices (IASCC), Reddy said there is new 'bi-polar' world with USA and China leading each block and despite the fact that both the countries have close 'economic integration.'
In a short time at least, there are two financial risks which may arise out of Middle East- Iran or China-USA. The impact is likely to be in two aspects - oil price shock and capital flow. And the country which is most vulnerable to the shocks is India, he said.
"We are most vulnerable to capital account shock. And in fact these are the only two shocks where our external sector is vulnerable. We should keep that in mind," he said.
According to him, there are three economic challenges- climate change, demographic divergence and technology - which are global and can be resolved only through cooperation and concerted action on the part of all or most countries.
Climate change is where collective action is inevitable but is becoming increasingly difficult, the former RBI Governor said.
Demographic divergences are seriously affecting the macro economic balances and more importantly the compulsions to migrate, he said.
There is, as yet, no agreement on managing the migration that is inevitable. Capital is global but labour is national, he said.
Technology is the third most important element that would disturb the global balance in future as technological progress is so fast that the disruptive nature of technological developments are so deep that institutions are finding it difficult to cope with these changes," he said.
Further, Reddy said, the technologies have a tendency to cut across the national boundaries sooner than later, he added.