Trade imbalances, dip in FDI challenge to growth

Finance Minister Pranab Mukherjee said india's economy was getting back to higher growth, but faced many headwinds. He was addressing the parliamentary consultative committee for his ministry.

The minister listed trade imbalances, volatility in portfolio investments, current account deficit, drop in foreign direct investments to almost half of last year’s levels and the crisis in the Euro zone as the biggest concerns, a release from the ministry said on Thursday.

India’s current account deficit is expected to touch 3% of GDP in the current fiscal. Goldman Sachs has said in a recent report it could widen to 4% of the GDP by the end of the next fiscal.

The jump in the current account deficit is largely because of the high trade deficit — $81 billion in the first eight months of the current fiscal. Much of this current account deficit is funded by the $39 billion of investment by foreign institutional investors, but these flows are beginning to become volatile.

The sharp drop in FDI has also caused concern, because it has increased the reliance on short-term overseas funds to meet the deficit. FDI in the first six months of the current fiscal was $11 billion, down from $15.3 billion in the same period last year.

The finance minister said there was a need to improve the public distribution system to ensure the people below poverty line get foodgrain at nominal price of wheat at Rs 2 a kg and rice at Rs 3 a kilo. The finance minister also urged various stakeholders to be responsible in their assessment of the requirement of foodgrain if the government is to ensure that every needy person is provided for.