The Government on Thursday said though the economy is on the recovery mode, it still faces risks from volatility in capital markets, slow down in FDI inflows, trade imbalance, high current account deficit and European crisis.
Addressing the Parliamentary consultative committee attached to his ministry, Finance Minister Pranab Mukherjee said even while the economy is on a path of higher growth, yet there are certain areas of concern.
In this regard, he specifically mentioned trade imbalance, volatility of FIIs, current account deficit, reduction in FDI inflows to almost half in last six months and above all, crisis in Euro zone affecting trade balance.
FIIs have pumped in a record 39 billion dollars in the Indian capital markets in this calendar year so far.
However, FII money is considered hot and volatile in nature compared to foreign direct investment (FDI).
FDI inflows, however, declined 28 per cent in the first half of this fiscal to 11 billion dollars.
India's trade deficit stood at 81.7 billion dollars during the first eight months of this fiscal, more than half of its exports.
High commodity prices may further increase the deficit, the analysts said.
The current account deficit, representing net flow of income out of the country barring capital movements, surged three-fold to 13.7 billion dollars in the April-June quarter over the same period last year.
The deficit widened due to higher imports because of economic recovery and larger payments overseas for certain services.
After sovereign debt crisis in Greece, Spain and Portugal, banking crisis has erupted in Ireland.
Mukherjee said the Government has taken several fiscal and administrative matters to contain the price rise and continues to be vigilant on the price front.
Meanwhile, food inflation marginally rose to 8.69 per cent during the week ended November 27 against 8.60 per cent a week ago.
The Finance Minister said silver lining is that inflation in food item has declined to single digit.
"With normal rainfall, the kharif production is now expected to rise by over 10 per cent year on year for food grains and even higher for cash crops such as cotton and sugarcane," he add.