Find a way to push capital out of country: Rajan

India must find means of pushing capital out of the country, said Raghuram G Rajan, chief economist, International Monetary Fund (IMF).

The IMF economist was, however, against capping or taxing foreign exchange inflows from foreign institutional investors (FIIs). Rajan was addressing chief financial officers (CFOs) at the IMA India Annual CFO Lecture in Mumbai on Wednesday.

Reiterating the need to finance infrastructure through foreign exchange reserves, Rajan said the government needs to push for reforms whereby not only would India attract foreign direct investment (FDI) but also be able to utilise its reserves to pay for import of capital goods.

Montek Singh Ahluwalia, deputy chairman of Planning Commission, had proposed partly utilising India's $130-odd billion reserves to meet infrastructure financing.

India has also been talking of investing overseas as a means of managing the strong forex inflows.

"We need to send more money abroad, and need to be more creative in managing the inflows," he said, adding that at the same time, India should not open up capital account convertibility (CAC).

"India's foreign exchange reserves are significantly above the requirement and needs to be managed. India needs to find ways to push capital out," said Rajan.

"Ideally, the country would want the (excess) forex inflows to go out of the country by buying a lot of goods from outside. Reserves should be set off against purchase of capital goods," he pointed out.

Rajan did not feel CAC would be a solution to 'managing' the FII inflows.

India is not bullet-proof enough to ward of the impact of CAC, pointed out Rajan.

Considering the high fiscal deficit and the rising cost of financing it, it could become difficult to manage when foreign investors decide to exit the country as was the case during the Asian currency crises in 1997.

India's large fiscal deficit needs to be managed, financial sector reforms with regards to bankruptcy laws have to be in place, and the rupee should be free float instead of tailing the dollar, before India can have CAC, he said.

"It is important however, to put pressure on the government to declare a timeframe to allow CAC. Only then would the fiscal deficit be in order and it will also put pressure on the private sector in terms of corporate governance," Rajan added.