FM rules out full convertibility

Fiscal deficit, inflation will have to be reined in

Finance Minister Jaswant Singh has ruled out full convertibility of the rupee on capital account in the country till the fiscal deficit and inflation were fully reined in.

"As long as fiscal conditions are under constraint in the country, I think there should be no anxiety regarding the full convertibility of the currency," Singh said during Question Hour in the Rajya Sabha.

Factors like the state of fiscal deficit and inflation needed to be considered before opting for total convertibility of the currency. A roadmap had been suggested by the Tarapore Committee for moving to a full float of the rupee, he said.

Economists at the World Bank and the International Monetary Fund have often criticised India for its inability to contain its fiscal and revenue deficits. For 2003-04, India's fiscal deficit is budgeted at Rs 1,53,637 crore or 5.6 per cent of the gross domestic product. While the annual average inflation was about 4 per cent last fiscal, it has been witnessing an upward trend during 2003-04. Inflation for the week ended December 6 stood at 5.38 per cent.

In reply to a query on the management of the burgeoning foreign exchange reserves, which have touched $ 100 billion, the finance minister said it served the country "economically, psychologically and diplomatically". As a result of the healthy foreign exchange reserves, India had decided not to seek any assistance from any country, he said.

Singh had announced several measures in January this year to take India towards a full float of the rupee on the capital account. Aimed at creating a demand for dollars in India, he had allowed Indian individuals, mutual funds and corporates to make unlimited investments in foreign companies provided these companies had a minimum 10 per cent stake in an Indian company.

The minister further told Parliament that $7 billion worth of high-cost external debts had been pre-paid and added that India would continue to do so. The foreign exchange, for all practical purposes, has been made convertible in the country, as business houses can borrow foreign exchange for projects abroad. The high exchange reserves had also enabled the corporates to borrow at better rates, he said, adding that forex reserves were expected to rise further. "We have not reached a plateau (for forex reserves)," he said.

On warnings by an international economist that India could face forex management problems, Singh said the Reserve Bank of India had already taken measures in this direction. "We have many economists in the country and I am happy that this economist evinced interest (in India)," he said.

Forex reserves were invested in a multi-currency portfolio consisting of international convertible currencies, he said, adding that their deployment was guided by the principle of safety, liquidity and return.

Free float path

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• Tarapore Committee has suggested a roadmap for moving to a full float of the rupee
• Jaswant Singh had announced several measures in January this year aimed at full convertibility of the rupee on capital account
• Indian individuals, mutual funds and corporates allowed to make unlimited investments in foreign companies that have a minimum 10 per cent stake in an Indian company