FM cautions against volatility in FII flows, Europe crisis

FM cautions against volatility in FII flows, Europe crisis

New Delhi: The government on Thursday said though the economy is on the recovery mode, it still faces risks from volatility in capital markets, slow down in FDI inflows, trade imbalance, high current account deficit and European crisis.

Addressing the parliamentary consultative committee attached to his ministry, finance minister Pranab Mukherjee said even while the economy is on a path of higher growth, yet there are certain areas of concern.

In this regard, he specifically mentioned trade imbalance, volatility of FIIs, current account deficit, reduction in FDI inflows to almost half in last six months and above all, crisis in Euro zone affecting trade balance.

FIIs have pumped in a record $39 billion in the Indian capital markets in this calendar year so far.

However, FII money is considered hot and volatile in nature compared to foreign direct investment (FDI).

FDI inflows, however, declined 28% in the first half of this fiscal to $11 billion.

India’s trade deficit stood at $81.7 billion during the first eight months of this fiscal, more than half of its exports.

High commodity prices may further increase the deficit, the analysts said.

The current account deficit, representing net flow of income out of the country barring capital movements, surged three-fold to $13.7 billion in the April-June quarter over the same period last year.

The deficit widened due to higher imports because of economic recovery and larger payments overseas for certain services.

After sovereign debt crisis in Greece, Spain and Portugal, banking crisis has erupted in Ireland.

Mukherjee said the government has taken several fiscal and administrative matters to contain the price rise and continues to be vigilant on the price front.

Meanwhile, food inflation marginally rose to 8.69% during the week ended 27 November against 8.60% a week ago.

The finance minister said silver lining is that inflation in food item has declined to single digit.

Mukerjee underlined the need for improvement in public distribution system so that the poor can be insulated against food inflation.

The finance minister said the economy has done well in regaining its growth momentum from the impact of the global financial crisis over the last 18-month.

The economic growth recovered to 8.9% in the first half of this fiscal, after the impact of global financial crisis slowed it down since later half of 2008.

Now, the Government is talking about up to over 9 per cent growth this fiscal.

Mukherjee said the recovery has been broad based with agriculture, industry, manufacturing and services, all contributing to the consolidation of the growth.

He said more importantly, the economy has become remarkably resilient to both external and domestic shocks.

“It not only recovered rapidly from the global economic downturn and other external shocks, but also took the monsoon failure last year in its stride and is now showing robust growth," the minister said.

The minister said there is an urgent need to undertake more investment in research & development and innovation both by industry and the Government.

He called for development of skilled manpower to sustain the high trajectory of growth in future as well.