Washington, May 30:

Net capital flows to South Asia reached a record $40.1 billion in 2006, up from $28.3 billion in the previous year, with most of the increase going to India, the World Bank states in its annual report.

In GDP terms the flows rose from 2.8 per cent to 3.6 per cent, noted the report Global Development Finance 2007, released yesterday. But sustaining recent high gro-wth in South Asia will require continued economic reform, expansion of infrastructure capacity, and further reduction of security threats, it said predicting that these efforts will also contribute to higher capital inflows as they did in recent years.

Revamping tax collection systems to reduce evasion and improve tax collection to help finance the extensive government agendas is also important. Increased political instability represents another main risk. Heightened security concerns could hurt investor sentiment and undermine foreign capital inflows, which have contribu-ted to the region’s record four -year expansion, it stated.

The continued easing of political tensions between the governments of India and Pakistan bodes well for continued progress toward improved relations, it said. “GDP in South Asia expanded a robust 8.6 per cent in 2006, reflecting generally expansionary policy conditions. Growth was down slightly from 2005 due primarily to a deceleration of growth in Pakistan.”

In India, GDP increased by 9.2 per cent although signs of slowing appeared at the end of the year. On the other hand, Pakistan’s GDP increased by 6.6 per cent in 2006 significantly down from the 7.8 per cent growth rate recorded the previous year.

India’s restrictive policy conditions are expected to lead to deceleration in investment growth and weaker private consumption and government spending, contributing to a slowdown in GDP growth to 7.8 per cent and 7.5 in 2008 and 2009, respectively, the report stated.

Strong capital inflows were largely due to a $12 billion expansion in net private debt flows, while net equity inflows to the region increased only slightly, as a $3 billion increase in FDI was partly offset by a decline in portfolio equity flows.

At $22.9 billion in 2006, net equity inflows nonetheless account for the bulk (60 per cent) of net private inflows to the region. Much of the FDI inflows into India were concentrated in the service sector (telecommunications in particular) in response to liberalisation policies designed to attract FDI, such as easing ownership restrictions.

FDI outflows from India are also on the rise due to increasing cross-border mergers & acquisitions (M&A) purchases by Indian companies, mainly in high-income economies. Since 2004, FDI flows from India to Britain exceeded flows from Britain to India. The Indian multinatio-nal Tata acquired the Dutch steel company Corus for mo-re than $10 billion in 2007.

Rapid growth and the relatively expansionary stance of fiscal and monetary policies in the region have provoked a rise in inflation.

Zoellick World Bank’s new chief

WASHINGTON: President Bush has chosen former US trade negotiator and diplomat Robert Zoellick to replace Paul Wolfowitz as World Bank president. Zoellick, an executive at Goldman Sachs Group, would take over for a five-year term if approved by the board of the 185-nation development lending agency. Zoellick, 53, would have to rebuild morale at the bank after Wolfowitz antagonised managers and staff with his leadership style and by bringing in aides closely associated with the Bush administration. — DPA