Finance minister P. Chidambaram with US treasury secretary Henry M. Paulson in Mumbai on Monday. (PTI)

Mumbai, Oct. 29: The US today warned of unintended consequences of India’s move to restrict the inflow of foreign capital.

Speaking at the Infrastructure Investment Conference, organised by the US-India CEO Forum, US treasury secretary Henry Paulson said the restrictions would inhibit the efficiency of the economy.

Paulson also called for greater freedom to Indian financial entities. He said the Indian government should not make it mandatory for banks to invest in priority sectors and hold government securities.

“India is on the right path to reduce these risks. India has allowed greater flexibility in the exchange rate in recent months and the appreciation in the rupee has helped to reduce inflationary pressures,” Paulson told the gathering, where finance minister P. Chidambaram and Tata group chief Ratan Tata were present.

However administrative restrictions on capital flows are blunt instruments and can have unintended consequences. “They tend to inhibit efficiency and lose their effectiveness over time,” Paulson said.

The government should also remove the caps on foreign investment, he added.

Restrictions on debt financing, equity financing and asset allocations of financial institutions are barriers to the efficient utilisation of resources, Paulson said.

FM views

Chidambaram sought to allay fears over steps to moderate inflows. He said the Indian government was concerned about foreign inflows coming from unregistered entities. “So long as funds come in after registrations, they are welcome to do so,” he said.

The finance minister said infrastructure investments needed to go up to maintain high growth rates.

“India needs to increase investment in infrastructure from 5 per cent of its GDP to around 9 per cent of GDP in the next five years,” he added.