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India reassures Davos on impact of US 'tapering'

India's finance minister on Wednesday told delegates at the World Economic Forum at Davos his country had taken steps to protect against the impact of US monetary policy that many fear will cripple emerging market economies.

DAVOS, Switzerland: India's finance minister on Wednesday told delegates at the World Economic Forum at Davos his country had taken steps to protect against the impact of US monetary policy that many fear will cripple emerging market economies.

Speaking at the opening session of the annual gathering of the global elite, P. Chidambaram said his country's economy was due to grow by six percent in the financial year 2014 to 2015 and would approach "step-by-step" its potential growth rate of eight percent.

Chidambaram acknowledged he was "concerned" in May when the US central bank, the Federal Reserve, suggested it would gradually wind down - or taper - its $85 billion (63 billion euros) a month stimulus package.

This sparked instability in emerging markets, as much of the cash created by the Fed was parked there and investors worried this would be quickly withdrawn when the liquidity taps were turned off.

Developing countries saw huge inflows of capital when the US started the scheme in September 2012.

India, with its weak public finances and growth at a decade-low of five percent, was badly hit and the rupee slid to a record low in August.

But the minister said: "Now I think we have done a lot of preparatory work. There will be some consequences in developing and emerging economies but I think we are better prepared for the taper than when we were surprised in May."

He added: "Fiscal consolidation has taken place, there's more FDI flowing into India. We've added to our reserves, the rupee is stable and a number of other measures have been taken to bring stability into the capital market."

India's economy is performing far below its near double-digit expansion during the nation's boom times, due in part to high interest rates that have slowed investment and spending.

"It's accepted all round that the Indian economy has stabilised at five percent and that we are poised to grow back, step by step, to the potential eight-percent growth rate," the minister said.

"The financial year 2013-2014, we will be only five percent but financial year 2014-2015 (from March) we will cross six percent."

He vowed to continue the policy of reducing India's fiscal deficits and stressed that New Delhi had made a "clear decision that we will never, never, again allow fiscal consolidation to weaken."

Last year, global ratings agency Fitch voiced concern that "a steeper political struggle to pull in more votes" might prompt the government to unleash a populist spending spree before the polls due in May.

However, with the election looming in the world's biggest democracy, the minister said there was a danger of political instability on the horizon.

The "unfortunate result" may be that "there may not be a party with a clear majority or even a near majority," he said.

"It may turn out to be a fractured parliament and which government will come out of that, I cannot say," he added.

"There's still three months to the election and anything can happen."

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