UPDATE 2-India warns of FDI slowdown in pre-budget report

Fri Feb 25, 2011 4:57pm IST

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* FDI slowdown and impact on balance of payments a major worry * Persistent anti-inflation monetary stance needed * Calls for deepening financial sector reforms

(Adds details, analyst comments)

By Manoj Kumar and Nigam Prusty

NEW DELHI, Feb 25 (Reuters) - A sharp slowdown in India's foreign direct investments and any moderation in exports could further strain the balance of payments, the government's chief economic adviser warned on Friday.

The finance ministry's annual economic survey, released ahead of the federal budget on Monday, said policymakers must maintain a consistent anti-inflationary monetary stance, given stubbornly high inflation and strong growth.

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

"Inflation is clearly the dominant concern," the report said, adding that New Delhi needs policies to help reverse a fall in foreign direct investment (FDI) inflows.

India is on track in the current fiscal year that ends in March to attract $27.6 billion in FDI inflows, down from $35.6 billion in the previous year, a senior official said on Monday.

The survey, authored by the finance ministry's chief economic adviser, said policymakers should keep their options open if capital flows affect the economy adversely.

A key policy prescription in the survey would allow foreign direct investment in multi-product retail in a phased manner, with the aim to reduce the price gap between the farm and the consumer, although it gave little detail.

Global retailers such as Wal-Mart have been thwarted in their hope to open stores in the massive Indian market, as opening multi-brand retail to more foreign investment is opposed by key allies of the ruling Congress party as well as small shop owners.

The finance ministry also warned that the real exchange rate has been on the rise and may have contributed to the large current account deficit, which has been financed in large part by "footloose capital."

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

"While the economy has entered into a super-cycle of benign growth trajectory of 8-10 percent, there are also headwinds like inflation, current account deficit, fiscal deficit and quality of capital inflows," said Brinda Jagirdar, chief economist at State Bank of India.

The survey, a precursor to Monday's federal budget, said reforms were needed to streamline both land acquisition for industry and environmental clearances for infrastructure projects to sustain growth momentum.

The survey also made a case for deepening reforms in the banking sector and corporate bond markets.

Battered by a slew of corruption scandals, India's Congress-led government faces a battle to contain stubbornly high inflation, pushed up by food prices, without hurting economic growth amid signs a possible slowdown in industrial production. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For economic survey report highlights For preview of Monday's budget ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ >

OIL WORRIES

Rising oil prices, exacerbated by unrest in Libya, are also worrying policymakers.

Despite the challenges, the survey sees growth in the current fiscal year at 8.6 percent, rising to roughly 9 percent in the year ending in March 2012.

Its fiscal deficit is seen at 4.8 percent of GDP for the current year ending March, below the budgeted of 5.5 percent, thanks in part to $23 billion in telecom licence revenue.

The survey forecast a deficit of 4.8 percent for the next fiscal year, a level some economists regard as optimistic.

Early this month, Standard Chartered cut its fiscal year 2012 GDP growth forecast to 8.1 percent from 8.8 percent, citing recent signs of slowdown, especially in the capex cycle.

(Writing by Abhijit Neogy, Additional reporting by Rajesh Kumar Singh, Suvashree Dey Choudhury and Swati Bhat; Editing by Alistair Scrutton, Tony Munroe and Ramya Venugopal)

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