Economic Survey 2009-10: Absorbing capital inflows a challenge

Absorbing capital inflows from advanced economies could be a challenge for India as such inflows might lead to overheating of the economy, the pre-budget survey has cautioned.

''With interest rates at historic lows in most advanced economies, capital flows from these countries are finding their way into the fast growing Asian economies, including India,'' said the survey, which lists the risks that the Indian economy might face.

It added that issue that arises is whether inflows are in excess of the domestic absorptive capacity and whether this could lead to overheating of the economy. ''The related issue is the need to balance the competing objectives of price and exchange stability,'' it said.

The survey added that this can also be looked at as the ''impossible trinity'' dilemma of policy choice between price stability, exchange rate stability and capital mobility.

It also said that another challenge for the economy is that the advanced countries continue to face the risk of double-dip recession with high unemployment rate, growing fiscal deficit and high public debt-GDP ratios.

''Such risks can have direct implications for the Indian economy, which is increasingly integrated with the rest of the world,'' the survey said.