In his first media meeting in New Delhi Tuesday, University of Chicago Professor Raghuram Rajan, who recently took over as India's top economist after holding a similar post at the International Monetary Fund, called for less reliance on foreign institutional investors and more on FDI and urged more sectors be opened for FDI investments, the Times of India reported.
Rajan's comments come just after the coalition government led by Prime Minister Manmohan Singh, hobbled by scandals and accusations of lack of governance, announced a series of economic reform initiatives including allowing FDI in India's estimated $450 billion multi-brand retail industry as well as aviation against much criticism by some opposition parties.
"We have to be careful that we are not overtly dependent on external investors ... that this is an environment when the external investor is quite fickle," Rajan said, the Times reported.
"The safest form of financing is through FDI, without any doubt because it's long term. ... If you can make more financing through FDI, you are safer and so to the extent we can open up more to FDI ... there will be efficiency, because there will be more competition in local economy."
Foreign investors have been encouraged by the announcement of the reform initiatives and have invested about $1.67 billion in India's equity markets this month.
The report said there are also talks the government may raise the FDI cap in the insurance sector to 49 percent from the current 26 percent.
"More FDI is a good thing at this point, not in every sector but in many sectors," Rajan said. He also called for aligning domestic petroleum prices with those in international markets so as to reduce domestic subsidies that are adding to the huge fiscal deficit.
Rajan predicted the U.S. Federal Reserve's third monetary easing called quantitative easing or QE3 and similar measures by the European Central Bank would bring short-term benefits to India.
India's impressive economic growth, widely acclaimed in the past, has currently stalled to less than 6 percent, the slowest rate in three years. But there are signs it may be on the upside.
India, Asia's third-largest economy after China and Japan, is also struggling to reduce its near double-digit inflation, blamed largely on high food prices, which hit the country's poor the hardest.