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Mid-Year Review
Govt cautions against huge capital inflows
Tribune News Service

New Delhi, December 7
The government today said the rising capital inflows could impact growth even as the first half of the current financial reaffirms continuation of the momentum.

“There are short-term challenges of managing inflows without endangering the growth and price stability,” said the Mid-Year Review 2007-08, which was tabled by finance minister P Chidambaram in Parliament.

Pointing that the strong growth prospects of the Indian economy have been manifest in high corporate profitability, rising investment rates, higher GDP growth and rising capital inflows, it said: “Increased capital inflows can impact macroeconomic aggregates through exchange rate, trade and monetary variables.”

“However, the economy’s capacity to absorb such capital flows, as indicated by the level of current account deficit, has not risen as fast as the inflows,” it said, adding: “The management of capital inflows has been and is likely to remain an important issue.”

Noting that impetus to growth will continue to be provided by industry and services, which will become increasingly competitive, it asserted that growth in agriculture and absorption of labour in productive areas will need focus.

Asserting that reducing the volatility and reversing the decelerating trend in growth of agriculture remains a high priority of the government, the review quoted over exploitation of soil nutrients, poor rainfall and improper water management as some of the reasons that caused deceleration in the agricultural growth.

While industry grew by 9.8 per cent in the first half of 2007-08, services grew by 10.4 per cent and agriculture by 3.7 per cent.

The review is an exercise that has been obligated on the government because of the Fiscal Responsibility and Budget Management Act (FRBM), 2003. Therefore, every six months, the government is expected to present a report to Parliament.

With respect to the end of second quarter fiscal performance bench marks, the fiscal and revenue deficit indicators at end of second quarter in the current fiscal were higher than the targets prescribed under the FRBM rules.

However, the government has met the half-yearly target on total non-debt receipts (tax, non-tax revenues plus capital receipts like repayment of loans and miscellaneous capital receipts), which stands at 44.5 per cent as a portion to budget estimates (BE) against FRBM target of 40 per cent, it said.

Besides, improved performance on non-debt receipts, fiscal deficit at 53.8 per cent of BE 2007-08 compared to 58.2 per cent of the BE 2006-07 also showed some improvement.

However, there is a slippage in terms of revenue deficit as a proportion to BE 2007-08 at 85.5 per cent, vis-à-vis 81.8 per cent in the corresponding period of previous year.

Higher expenditure pressures were partly due to increased requirements of fertiliser and food subsidy and on interest payments as a result of higher borrowing under market stabilisation scheme, it added.

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