The short-term challenges on the external front are posed by the need to effectively manage an unprecedented influx of capital inflows and burgeoning foreign exchange reserves and to contain the adverse effects of appreciation of the rupee on Indian exports, said the Finance Minister of India today in Editor's Conferce here in New Delhi.

He said that the inflows are a test of the absorptive capacity of the economy. Further, domestic prices may also be impacted by international hardening of food grain, commodity and energy prices. The economy must also be insulated to the extent possible from the potentially adverse effects of the economic slowdown occurring in some of its major trading partners.

In the medium and long term, one of the biggest challenges is to effectively sustain the high pace of growth witnessed in recent years.

There is also shortfall of money, as is indicated in his speech. He said that we must find ways and means to mobilise these resources and complete the infrastructure projects without cost or time overruns.

Another cause of concern is the slow-growing farm sector. Issues like stagnant yield rates in many important crops, declining per capita availability of food grains and need for additional public investment call for urgent policy attention.

The rate of growth stood at 9.4 per cent during 2006-07. The growth rate during the first quarter of 2007-08 was an impressive 9.3 per cent over the corresponding quarter of the previous year.

Mr Chidambaram explained that the high growth has been facilitated by an unprecedented increase in the rate of investment from 22.9 per cent in 2001-02 to an estimated 35.1 per cent in 2006-07.

If this rate of growth is sustained, he said, according to Goldman Sachs, over the next 30-50 years, India is likely to grow fastest among the BRIC economies — Brazil, Russia, China and India. McKinsey Global Institute has predicted that India will have the world's fifth-largest consumer market by 2025, with about 583 million people forming its middle class.

There is marked Structural shift in the growth pattern. The share of industry in GDP has increased from 25.6 per cent in 2003-04 to 26.6 per cent in 2006-07, while there has been a decline in the share of agriculture and allied sectors from 21.7 per cent to 18.5 per cent during the same period. Services sector increased its share from 52.7 per cent to 54.9 per cent.

There is a robust growth of bank credit to industry. Outstanding credit to the industrial sector by the Scheduled Commercial Banks witnessed a growth of 30 per cent and 28.4 per cent in 2005-06 and 2006-07 respectively.

Internal generation of funds continued to provide strong support to the funding requirements of the corporate sector, he said. Net FDI into India has grown from US$ 4.7 billion in 2005-06 to US$ 8.4 billion in 2006-07. FDI flows in the current year upto June 30, 2007 have been estimated at US$ 6.4 billion.

The growing interest to invest in Indian industry is best embodied in the BSE Sensex that touched an all time high of 19,977 at closing on 29th October 2007.

He says that the Balance of Payment position is under manageable limit despite the fact that India's trade deficit of US$ 21.6 billion. The current account thus shows a deficit of US$ 4.7 billion primarily due to the relatively higher growth of imports vis-à-vis exports. Net invisibles, despite recording a robust level of US$ 16.9 billion, fell short of the trade deficit.

The surge in capital flows, apart from causing volatility in the forex market, has led to an accumulation of reserves. The foreign exchange reserves increased to US$ 199 billion at end-March 2007 and further bourgeoned to US$ 262 billion on October 26, 2007.

There is a widespread concern about the possible adverse effect of Rupee appreciation on exports, he said, but the Government has announced three packages to tackle them. The total value of these packages is estimated at Rs.5,200 crore.

In 2006-07, the net capital inflows almost doubled from the level of the previous year to touch US$ 46.2 billion. External commercial borrowings (ECBs) alone accounted for about 35 per cent of total capital flows, enabled by ample liquidity and favourable interest rates in the global markets on the one hand and rising financing requirements for capacity expansion domestically on the other.

The ratio of external debt to GDP came down from 38.7 per cent in 1991-92 to 21.1 per cent in 2001-02 and further to 16.6 per cent in 2006-07 (revised). By end-June 2007, the ratio of foreign exchange reserves to total external debt stood at 129 per cent, which he said comfortable.

The Finance Minister said that high inflation in 2006-07 was triggered by shortfalls in the domestic supply of some agricultural commodities and hardening of international prices on the supply side and high growth in money supply and credit on the demand side.

The financial year 2007-08 has so far shown the expected revenue buoyancy. 40.7 per cent of the budgeted revenue receipts have been realized by September 2007, as against 40.0 per cent during April-September 2006-07 and 35 per cent during April-September 2005-06. Revenue receipts and capital receipts, especially non-debt capital receipts, have shown improvement. On the revenue side, the gross tax collection has shown a 25 per cent growth during April-September 2007. Customs duty has increased by 16 per cent, taxes on income by 38.9 per cent, corporation tax by 41 per cent, service tax by 36.3 per cent and union excise duty by 6.5 per cent. Non-tax revenue went up by 19 per cent during the period.

On the expenditure front, 42.3 per cent of the budgeted plan expenditure has been realized by September 2007, as against 39.9 per cent during April-September 2006-07. Notably, a greater increase is seen in the plan capital expenditure (49.4 per cent as against 38.4 per cent) than in the plan revenue expenditure (41.0 per cent as against 40.2 per cent).

We have already reached 48.6 per cent of the budgeted non-plan expenditure too, as against only 46.8 per cent by September 2006, said Mr Chidambaram.

Fiscal deficit stands at 53.8 per cent of the budgeted figure by September 2007 as against 58.2 per cent for the corresponding period last year.

The Central Statistical Organisation has reported that the poverty ratio has fallen from 36% in 1993-94 to 27.5% in 2004-05 (both following data collected employing Uniform Recall Period).

However, statistically, unemployment rate (usual principal status) seems higher at 3.06% of the labour force in 2004-05 as compared to 2.78% in 1999-2000. The growth in labour force has been higher, which increased from 1.60 to 2.54 per cent during the period while the growth in the workforce (i.e. people actually employed) has increased from 1.57 per cent to 2.48 per cent. (EOM)