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'Huge capital inflows likely to trip growth'

Finance Minister P Chidambaram says the financial policy must adjust to the dollar tide, reports Gaurav Choudhury.

business Updated: Dec 08, 2007 05:03 IST
Gaurav Choudhury

The Government said on Friday that abundant capital inflows, if not managed prudently, could derail the growth momentum and felt that productivity increase was a more robust solution for exporters to address concerns arising out of the rupee's appreciation.

“There are short-term challenges of managing inflows without endangering the growth and price stability… Financial policy and monetary management must adjust continuously to such challenges,” said the Mid-Year Review 2007-08, which was tabled in Parliament by Finance Minister P Chidambaram.

The review said that the capacity of the economy, which has grown by more than 8.5 per cent in the last four years, has not risen as fast as the inflows. “Increased capital inflows can impact macroeconomic aggregates through the exchange rate, trade and monetary variables. This was particularly manifest in the first half of the current financial year and thus the management of capital inflows has been and is likely to remain an important issue,” it said.

The review indicated that it might not possible to hedge exporters through fiscal sops in wake of the rising rupee on a long-term basis.

“Medium and long-term solutions lie in improving productivity in exports for India to be more competitive vis-a-vis its competitors,” the review said.

The rupee has appreciated by over 15 per cent between October 2006 and October 2007.

“Over the medium and long-term, there is no one-to-one relationship between currency appreciation and exports,” it added.

Sectors such as textiles, handicrafts and leather, which have low import intensity, have witnessed a lower export growth. On the other hand, sectors such as gems and jewellery, and petroleum, oil and lubricants, that have higher import intensity, have witnessed higher export growth, it said.

“Relative appreciation of the currencies of major competitors, the import intensity of the major export sectors, a combination of exchange rate and inflation reflected in Real Effective Exchange Rates, and slowdown in growth of world economy/world trade affect exports,” the Mid-Year Review said. It also said said that the average area under farming has come down to 1.32 hectare in 2000-01.

“Only about 18 per cent of the 120 million operational holdings (land under farming) are above 2 hectare area,” the review said.

“Combined impact of weather and acreage response may lead to occurrence of year of plenty and severe scarcity…identification of a durable pan-India solution is an imperative,” it added.