Mukherjee Says Wider European Crisis Would Hurt India

June 4 (Bloomberg) -- India’s economy would be hurt should the sovereign debt crisis that originated in Greece spread in Europe, Finance Minister Pranab Mukherjee said.

“If the whole of Europe is affected by the debt crisis it will be harmful to us,” Mukherjee said today in an interview in Busan, South Korea, where he is attending a meeting of finance officials from the Group of 20 nations.

The European Union is India’s biggest overseas market, accounting for a fifth of the nation’s merchandise exports. The South Asian nation, which opened its market to foreign investors in 1991, has become vulnerable to slowdowns and financial crises abroad as exports play a bigger role in the economy.

Trade represented 35 percent of gross domestic product for the year ended March 31, 2008, up from 21 percent in 1997-98, the year of the Asian financial crisis, according to the central bank.

India’s economic growth accelerated to 8.6 percent last quarter, the fastest pace after China among the world’s major economies.

Growing consumer demand is stoking inflation, with the benchmark wholesale-price index climbing 9.59 percent in April.

Inflation is “an area of concern, but I’m not pressing the panic button,” Mukherjee said. “There is a disturbing signal as core inflation is likely to go up.”

Core Inflation

Core inflation, which excludes food and fuel prices, is currently close to 6 percent from 1.8 percent at the end of 2009, Kaushik Basu, chief economic adviser in the finance ministry, said yesterday.

The Reserve Bank of India has raised interest rates twice since mid-March by a quarter percentage point each time. The bank’s benchmark reverse-repurchase rate is 3.75 percent.

Last month, Subir Gokarn, the deputy governor in charge of monetary policy at the Reserve Bank, said the central bank will pursue a “cautious” pace of monetary tightening because of risks to growth posed by Europe.

The G-20 is meeting at a time when the U.S. and Europe are split on the scale and timing of increases in bank-capital requirements, which have been under discussion since governments were forced to bail out lenders, an official from a G-20 government said.

Countries such as the U.S., whose economies are largely financed by markets, want banks to be required to hold more assets on their balance sheets to buffer against future crises, the official told reporters on condition he not be named.

Policy makers in continental Europe, where banks provide more financing, are concerned that too-high reserves risk choking off growth, the official said.

Mukherjee said “regulated mechanisms, instead of taxing the banking system, are better,” without providing details.