India on Wednesday expressed deep concern over the excessive outflow of foreign exchange and admitted that the Euro Zone debt crisis is likely to make the third and the fourth quarter of the current fiscal “very difficult.”

The admission comes in the backdrop of the World Bank warning of an impending global economic crisis as grave or graver than in 2008-09. In its latest Global Economic Prospects 2012 report, the World Bank has asked developing countries to “evaluate their vulnerabilities” in view of the ‘dimming global growth prospects and the Euro area debt problems.”

“Europe is the prime concern for us. Excessive outflow of foreign exchange is bothering us,” a senior Finance Ministry official told Business Line .

According to the latest RBI figures, India's foreign exchange reserves stood at $293.54 billion as of January 6, down from $296.69 billion as of December 30, 2011.

Meanwhile, European banks have practically shunned commercial lending and are now frantically managing their portfolio by trying to replace the worst-performing bonds of different countries with those that are performing well, export industry sources said. This, in turn, has led to a situation where an increasing number of Indian exporters have been approached by their European buyers with requests for deferred payment or payment in instalments, they said. However, they added that though there might be a delay in payment, there have been no reports of default so far.

Exporters from across the sectors are worried about the ongoing ‘credit freeze' in Europe as the region accounts for a fifth of India's total exports ($46 billion of $251 billion in 2010-11). The export sectors that could be the most affected due to the deepening crisis in Europe are engineering, chemicals and even gems and jewellery to some extent, the sources said. Also, when their governments, which are big spenders themselves, are cutting down their expenditure, it is going to have a ‘reverse acceleration' effect on private spending, they added. “There is a huge fall in orders. In fact, there is a demand crisis in most European countries, except for Germany and the UK to a certain extent,” a source said.

In sectors such as chemicals, where many are contract manufacturers, many have been operating on a deferred payment basis for some time, the sources said.

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