Forex inflows still a 'challenge': Survey

Govt's annual report doubts ability to eliminate revenue deficit.

Calling double-digit growth a tough task, the government today cited foreign capital inflow and inflation as the macroeconomic challenge to high sustained growth in its Economic Survey for 2007-08.

"If you wish me to sum up in one phrase the outlook for 2008-09, I would say optimism but with caution is the watchword," Finance Minister P Chidambaram told reporters after presenting the Survey in Parliament.

The annual report card on the economy also said the target of bringing the revenue deficit down to zero by 2008-09 would "remain a challenge," pointing to a step-up in expenditure as the Congress-led United Progressive Alliance prepares for general elections next year.

Though bullish on growth, the Survey has sounded an unmistakable note of caution on the capital inflows that the country has seen in the last several months.

As these inflows are substantially higher than what the country needs to cover its trade deficit, these funds threaten to raise prices, leading to a tighter monetary policy. This, in turn, is threatening to capital investments in the country.

As the sub-prime crisis unfolds in the US and Europe, global investors are likely to be more risk-averse and are, therefore, likely to cut investments in emerging markets like India, the Survey says.

However, this could be balanced out by the increased liquidity created by Western Central Banks to deal with the crisis.

"On balance, the decline in capital inflows as a proportion of GDP in 2008 is likely to be modest," the Survey notes.

There could be a softening in global commodity prices because of the moderate slowdown in the world economy led by the sub-prime crisis in the US, the Survey says.

However, the slowdown could hurt Indian exports, resulting in a modest increase in the country's deficit in trade of goods and services, unless the US slowdown turns into a severe recession, it adds.

The Survey also lists radical policy reform options. These include allowing regulated private entry into coal mining, phasing out controls on sugar, fertiliser and drug industries, opening up all retail trade to foreign investment, raising foreign ownership of insurance companies from 26 per cent to 49 per cent (51 per cent for companies operating in the rural sector) and allowing foreign companies to set up fully-owned rural banks.

Some of these options like opening retail and insurance sectors have been debated internally by the government in the past. However, opposition from its Communist allies has made it put these proposals on the backburner.

The Survey does not mention how actively these options are being considered by the government. However, a finance ministry official told Business Standard that these are the policy reforms that need to be undertaken if the country wants to move to the high growth trajectory.

"Hopefully, the inputs will be picked and debated for implementation. These are suggestions and not recommendations," the official said.

In addition, the Survey calls for amending the Factories Act that would allow companies to meet seasonal ups and downs in demand and new bankruptcy laws to facilitate the exit of old management as expeditiously as possible.

It also lists an ambitious disinvestment programme of listing all closely-held public sector companies and auctioning all loss-making units that cannot be revived.

For the first three years of its rule (2004-07), the government kept its word to the Left parties and did no disinvestment at all. It was only earlier this year that it decided to list all its power utilities.