Strong growth momentum; high inflows threat to growth, prices

New Delhi, Dec 7 (UNI) Stating that the economy grew by 9.1 per cent in the first half of the current fiscal, the Mid- Year Review of the government today warned that excessive capital inflows could endanger the growth process and price stability.

The Review, tabled by Finance Minister P Chidambaram in Parliament, says a problem related to high growth which needs sustained attention was that of capital inflows. Higher economic growth and the prospects of continued high growth have attracted private capital flows in excess of the Current Account Deficit(CAD).

In the medium term, all these flows will play a role in the development of markets for capital intermediation, risk and entrepreneurship and thus help in raising the efficiency and competitiveness and growth potential of the entire economy.

However, in the short term these excess inflows have put pressure on the local currency to appreciate.

It notes that many high growth economies have faced similar situations in the past and have managed it in different ways.

''Management of inflows is a complex problem as it is interlinked with monetary management and inflation, trade policy, capital market development, the issues related to production, investment and growth. An integrated view has to be taken so as to maximise the benefits of capital flows and to minimise the potential short term costs and risks to the economy,'' the Review says.

It notes that the Indian economy was witnessing robust growth for four years in a row. ''The buoyant growth in the first half of the current year reaffirms continuation of this momentum,'' it says, adding that the growth process, however, needs to be made more inclusive.

The Review says while impetus to growth will continue to be provided by industry and services, which will become increasingly competitive, growth in agriculture and absorption of labour in productive areas will need focused attention.

It says the strong growth prospects of the Indian economy, which registered a growth rate of 9.4 per cent in 2006-07, have been manifest in high corporate profitability, rising investment rates, higher GDP growth and rising capital inflows.

The Review says increased inflows have been witnessed, especially in the first half of current financial year, while the economy's capacity to absorb these has not risen at the same pace, as indicated by the level of the Current Account Deficit.

It enjoins upon the government to maintain a thrust on agriculture and employment.

It notes that inflation eased below 4 per cent after 68 weeks.

The Review says 4.7 crore additional jobs were created between 1999-2005.

It calls for a consensus for streamlining food, oil and fertiliser subsidy. The main objective of reform of subsidies is to make them ''explicit, transparent and work for the poor''.

''Reform can unleash a virtuous cycle of enhancing the consumption of specific essential items by the poor, re-orient public expenditure for investment and infrastructure, and raise growth and employment.'' ''Targeting the three major subsidies on food, fertiliser and petroleum products is, therefore, an imperative,'' the Review says.

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