Survey fears European debt crisis could hit Indian economy

The continuing sovereign debt risk in peripheral euro zone countries and fears that it could spread to the financial sector pose a risk to global recovery, the Economic Survey said on Friday.

The continuing debt turmoil in the euro zone area could have an adverse fallout on the Indian economy, hurting its capital flows as well as exports, the Economic Survey said on Friday.

Further, it noted that rising international oil prices could aggravate the current account deficit, which is already at high levels.

Many countries like Greece and Portugal that are part of the euro zone - a grouping of 16 nations that share a common currency euro - are grappling with severe debt crisis that has even threatened to derail the fragile global economic recovery.

"The continuing sovereign debt risk in peripheral euro zone countries and fears that it could spread to the financial sector, together with the high fiscal and public debt in several advanced countries, pose a risk to global recovery.

"In the event of the crisis spreading, it could have fallout for the Indian economy through reversal of capital flows and slowdown in exports," said the Survey tabled in the Parliament on Friday.

It says the fragile global recovery and robust domestic growth have led to higher current account deficit in 2009-10 and 2010-11 (April-September), "which is a matter of some concern".

"The problem may be further aggravated by the rising international oil prices," it noted.

Current account deficit happens when the total imports of goods, services and transfers is higher than total export of goods, services and transfers.

Official preliminary estimates show that current account deficit stood at $27.88 billion in April-September period of the current financial year.

During the same period last financial year, current account deficit was at $13.34 billion.

Global oil prices has been climbing in recent weeks due to the political unrest in the Middle East, especially in Libya, which has one of the largest crude reserves in Africa.

The Survey said that majority of the capital inflows are in the form of FIIs, which are volatile in nature. FIIs have pumped in about $24 billion in the April-September 2010 period.

"Periodic surge in capital flows could lead to problem of absorptive capacity in the economy, fuelling asset price bubbles, currency appreciation and stoking inflation. The challenge is in managing such surge in capital flows," it added.

On the other hand, FDI inflows stood at just $19 billion till November in the current financial year.

"Steps have to be taken to encourage FDI inflows vis-a-vis other forms of capital," the Survey noted.