India won't be affected much by Dubai - minister

INDIA STORY: Indian stocks and the rupee were rattled on Friday.(Getty Images - for illustrative purposes only)

Dubai's debt crisis will not affect India much but the government is keeping a close watch and will act to prevent any fallout, the finance minister said on Saturday.

"The impact cannot be much as our stake is so small and the amount involved compared to the world economy is miniscule," Pranab Mukherjee told reporters in Chandigarh, where he was delivering a lecture.

"Watchful and effective intervention at the appropriate time can avert some immediate crisis," he said.

Indian stocks and the rupee were rattled on Friday after Dubai's woes stoked fears over corporate exposure to a key trading partner and that foreign funds would lose their appetite for risk.

The United Arab Emirates (UAE), of which Dubai is part, is the second-biggest export destination for India and accounts for 10-12 percent of India's inward remittances.

Mukherjee said the emirate's problems could force a return of Indian citizens, who make up more than 40 percent of the UAE's population.

Mukherjee said the stimulus measures that buoyed the economy in the wake of the financial crisis were unsustainable and the government would have a roadmap by December to consolidate its fiscal position over the next five years.

The firefighting policies by Asia's third-largest economy have contributed to a bulging of the fiscal deficit to a projected 6.8 percent of GDP for 2009/10.

"This level of fiscal expansion can only be a short-term response and is unsustainable on a long-term basis," Mukherjee said in his speech.

Prime Minister Manmohan Singh has said India would likely wind down its stimulus measures next year.

The Reserve Bank of India has already started what it calls the first phase of the exit from its easy monetary policy, worried about inflationary pressures.

India's economy was set to grow at 6-7 percent in the financial year to March and the government was efforting a return to the 9 percent growth rate seen before the crisis clipped the pace of expansion, Mukherjee said.

The worst of the financial crisis seemed to be over and there would not be a lasting impact on India's development outlook over the medium to long term, he said.

"The caveat is a sustained recovery of the developed countries from the current crisis," he said.

Mukherjee also said the RBI had intervened in the forex markets to stabilise the rupee after the crisis. (Reuters)

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