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FDI slowdown, fiscal deficit main worries

The Indian government warned today that a slowdown in Foreign Direct Investment (FDI) inflows, as well as, tepid growth in developed countries could hit the country's exports and strain its balance of payments.

business Updated: Feb 25, 2011 12:53 IST

The Indian government warned on Friday that a slowdown in Foreign Direct Investment (FDI) inflows, as well as, tepid growth in developed countries could hit the country's exports and strain its balance of payments.

The Finance ministry's annual 'Economic Survey', a precursor to Monday's budget, said reforms were needed to streamline both, land acquisition for industry and environmental clearances for infrastructure projects to sustain India's growth momentum.

The survey said a persistent anti inflationary monetary stance was needed given current high inflation and economic growth.

The ministry also said farm output must be increased to combat high food prices.

Already hit by a slew of corruption scandals, the Congress led government faces a battle to contain stubbornly high inflation, pushed up by food prices, without hurting economic growth amid signs of a possible slowdown in industrial production.

Rising oil prices spurred by unrest in Libya are also worrying policy makers. India faces the dilemma of either passing on oil price rises to consumers and risking voter anger, or absorbing price rises in subsidies that may strain goverment finances.

The economy grew 8% in the fiscal year 2009-10 and growth momentum accelerated through the first half of the current fiscal year, through September, to nearly 9% as the farm sector rebounded after it was hit by drought the previous year.

Prime Minister Manmohan Singh had said earlier this month that high inflation is a risk to growth momentum. His government is committed to achieving a high growth rate of 9 to 10%.

Policymakers have expressed worry about India's current account deficit, which widened in the September quarter to a record high of $15.8 billion, as booming consumer demand sucked in imports and service sector exports suffered from tepid global demand.

A recent report by Goldman Sachs said India's current account deficit may widen to a record 4% in the current fiscal year ending March from 2.9% in the previous year. The report also said the current account gap could grow to 4.3% in the fiscal year that ends in March 2012, and warned that increasingly the huge gap is being financed by short term flows.

A trade ministry document released on Wednesday said that a high trade deficit could lead to an unsustainable current account deficit and may also trigger balance of payments difficulties.