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Emerging economies face risk of capital flows

Special Correspondent

— Photo: Shiv Kumar Pushpakar

CHALLENGES:Pranab Mukherjee (right) Union Finance Minister and Prof. Michael Spence at the international conference in New Delhi on Tuesday.

NEW DELHI: Finance Minister Pranab Mukherjee on Tuesday sounded the alarm bell for emerging market economies witnessing large foreign capital inflows to take note of the threat to their financial stability.

In his inaugural address at an international conference on ‘Economic policies for inclusive development' organised by his Ministry and the National Institute of Public Finance and Policy (NIPFP) here, Mr. Mukherjee said: “The emerging economies, though faced with brighter growth prospects, are confronting financial instability caused by international capital flows”.

Emerging economies, he said, should leverage their growth to improve social outcomes and, at the same time, monitor the financial sector. The Finance Minister's remarks assume significance in the current environment of massive capital inflows into the emerging economies in search of higher returns which, if not absorbed, tend to destabilise currency valuations and also fuel inflation.

In fact, foreign financial institutions have so far pumped in more than $38 billion into India's capital market following the prospect of higher yields on their investments in the wake of the ongoing uncertain environment in the advanced economies.

Mr. Mukherjee pointed out that as a result of the global financial crisis, advanced economies are still grappling with the burden of public debt and the resultant financial strain.

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

As for India, Mr. Mukherjee said the process of financial inclusion should be so designed that it does not hurt fiscal consolidation and the 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.

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