Business Economics & Services Team
Capital Account Convertibility of Indian Rupee
The other day, I heard somebody, who poses to be one in the knowledge of what the government is going to do telling that soon the government will announce a road map for moving towards capital account convertibility of the Indian rupee. I felt that term he used road map was in appropriate since the government, long back had taken some steps that could lead to capital account convertibility. To list them in sequence is not a problem. Long back in 1991, the government had announced the partial convertibility of rupee under the trade account enabling the exporters to park 50 per cent of their proceeds in foreign banks under intimation to RBI. Later, the government allowed floating of GDR, ADR and also private placements of foreign funds in the Indian companies etc, which was an incremental advancement towards capital account convertibility.
Inflow of funds from Foreign Institutional Investors (FIIs) and PE route investments were another set of reform, which were aimed at revitalizing the Indian stock market. It is important to note that these investors can bring in and repatriate investment in dollar terms as and when they like. In a way, they enjoy convertibility of rupee under capital account, which is denied to other segments of investors.
In between, there was another stage when the people where allowed to source dollar or any other convertible currency from the market for the purposes of education, tourism purposes and treatment etc. Earlier, such requests were to be managed by the RBI and one can get the foreign exchange only after RBI approved it. There were also ceilings imposed for release of foreign exchange. . Removal of such restrictions can be termed as rupee becoming convertible under the current account.
Liberalizing lobby in India campaigned for capital account convertibility some 10 or 12 years back . They would have succeeded in their efforts but for what that had happened in Mexico and South eastern countries, which were showcased as models of economic reforms by the multilateral organizations like IMF, World Bank etc. Riding back on the euphoria created by the foreign media, these countries had resorted to convertibility of their currency under capital account. Then onwards, the mayhem started. These economies were collapsed one after the other like a pack of cards. Many had written obituaries for these economies. That also helped the Indian administration to be more vigilant and to postpone the capital account convertibility.
It is important to examine what happened in the these countries. When the local currency became weaker, the citizens converted their assets into dollar denominated savings and investments. Local currency and assets had become valueless. Also, there were huge speculative syndromes, when people frely converted their assets from one currency to the other to take advantage of the speculation. These countries also faced a massive current account deficit and had to be in ventilation for quite sometime. Thanks to some timely interventions from the multilateral organizations and more importantly due to their meticulous planning and tightening of belt, economies had limped back to normalcy now. One advantage with them was that unlike India, theirs were smaller economies and the impleemtation of the plans were easier and faster.
Now coming back to the rumor. Harping on convertibility of rupee on capital account will prove to be the most disastrous that the government can take at this stage. Our current account deficit is very high and at times can go out of bounds. One reason, the economic pundits, who support convertibility advocate is that India has sufficient foreign exchange reserves at any given point of time and even if there is massive flight of capital in the aftermath of the convertibility, India will be able to hold the bull by the horn. This was also the reason adduced by the Mexico and South eastern countries at that of point of time. We know what had happened to them
For more details: jthac1234@yahoo.com,jthac1234@gmail.com
0 comments:
Post a Comment