Signaling caution over the expected surge in crude oil prices due to supply disruptions from Iran, Christine Lagarde, managing director, International Monetary Fund, advised India to diversify its oil supply sources swiftly in efforts to balance out the rising geo-political tensions.

The IMF chief, on a two-day visit in the capital, was speaking at a conference on growth aspects of Indian and Chinese economies. Despite stringent sanctions put in place by the US, Indian government is working out ways to resolve the payment dispute with its second largest supplier, Iran. A part rupee payment along with tax breaks offered in the Budget have been viewed as a sign of defying US dictates.

Lagarde said, "if there was for instance a major shortage of exports of oil out of Iran, it would certainly drive up prices at least for a period of time. We believe that it would be in the range of 20-30%."

Expressing concern over an oil shock of significant magnitude on the world economy, IMF chief cautioned that India too will be affected if oil prices surge sharply.

Meeting key policy makers in the country, Lagarde said "we are encouraged to see that India has continued its efforts towards fiscal consolidation. The determination to reform the tax code and commitment expressed by Finance Minister to cap subsidies at (below) 2% of GDP is greatly appreciated".

She also applauded efforts taken by India to target its subsidies to the beneficiaries in the form of Unique Identification card.

Calling India and China as the key growth drivers crucial for world economic recovery, Lagarde advised government to facilitate investor friendly measures which will spur private investment. She also stressed on opening up the retail sector to foreign investment which can boost the economic activity in the country.

The IMF chief's visit to India, after spending two days in China, comes against the backdrop of the multilateral agency looking to boost its financial resources. India has substantially hiked it's funding to IMF in hopes to strengthen it's voice in the IMF forum.

Lagarde expressed optimism at the pace of economic recovery of the western world. She said that the global economy has moved back from the "abyss" but there are still serious weakness in the world financial system.

"We are further away from the abyss than we were three months ago," she said.

Lagarde said steps by the European Central Bank and some European countries had helped stabilise the overall situation but there were still areas "that need to be attacked with vigour", such as shoring up financial institutions.

"Financial institutions were high contagion agents for this crisis - this tells us where reforms have to focus. Financial institutions have to be agents for growth, not a threat to growth," she said.

IMF has been playing a key role in stabilising the world economy, especially in providing financial assistance for the debt-laden Greece.

Copyright 2012 The Financial Express, distributed by Contify.com. All Rights Reserved.