Large foreign capital inflows risk for emerging economies: FM

Finance Minister Pranab Mukherjee today sounded a cautionary note for emerging market economies that are witnessing substantial foreign capital inflows, warning that the spate of overseas money raises the spectre of financial instability in such countries.

"The emerging economies, though faced with brighter growth prospects, are confronting financial instability caused by international capital flows," Mukherjee said at a conference on inclusive growth organised by his ministry and economic think-tank National Institute of Public Finance and Policy (NIPFP).

Emerging economies need to leverage their growth to improve social outcomes and at the same time monitor the financial sector, he added.

The remarks of the Finance Minister came on a day when official data showed that the Indian economy grew by 8.9 per cent in the second quarter, better than expected.

FIIs have pumped over $38 billion into capital markets in India this year so far, encouraged by the prospect of sizeable returns on their investment amid uncertainty elsewhere in the world. In addition, the country has attracted FDI worth $15.97 billion in the ongoing fiscal. However, this is down 26 per cent year-on-year.

The Finance Minister said that as a consequence of the global economic crisis, advanced economies are grappling with public debt and the resulting financial strain.

"In advanced economies, there is a need to maintain the policy focus on recovery and management of public debt," he said.

The global financial crisis pulled down economic growth worldwide. As a result, many countries had to provide a stimulus and come out with bail out packages to keep industry afloat. Now, some of these countries are grappling with high debt.

One of the latest countries faced with a sovereign debt crisis is Ireland.

In the context of India, the Finance Minister said the process of financial inclusion should be designed in such a way that it does not hurt fiscal consolidation and growth itself.

"We need to design policies in a manner that the redistributive process does not feed off the public finances and the growth process itself is not hampered. To this end, inclusive development needs to be combined with consolidation of public finances, financial stability, employment generation and economic growth," he said.