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Jayant Sinha, minister of state for finance, said on Wednesday India should embrace capital account convertibility if it has to become a top global economy. Last week, Reserve Bank of India Governor Raghuram Rajan said, “My hope is we will get to full capital account convertibility in a short number of years.”
Capital account convertibility means the freedom to convert rupees into foreign currency and back for capital transactions. India has current account convertibility but not capital account convertibility.
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“We are surely on that path but it will take a few more years. The rupee as a currency should be more frequently traded internationally,” said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund.
India’s external sector was vulnerable till recently, with the current account deficit above the comfort level of 2.5 per cent of the gross domestic product. It was 4.2 per cent of gross domestic product (GDP) in 2011-12 and rose to 4.7 per cent in 2012-13. After severe curbs, including restrictions on import of precious metals, the deficit fell to 1.7 per cent in 2013-14. In 2014-15, it continued to stay low, with the third quarter showing a deficit of 1.6 per cent.
The fiscal situation remains fragile. The turning point was in 2007, the year of the global financial crisis. The fiscal deficit of the central government has been 4.6-6.5 per cent in the past six years, before falling to 4.1 per cent in 2013-14. The government is committed to keeping the fiscal deficit low and the target of 3.9 per cent has been retained for this year. The deficit target will be progressively reduced to 3.5 and three per cent in 2016-17 and 2017-18, respectively.
Experts believe utmost care should be taken along the path of convertibility. Ajit Ranade, chief economist at the Aditya Birla Group, who was part of an RBI committee on capital account convertibility in 2006, said many of the recommendations of the committee had been implemented, including raising the amounts resident Indians could remit abroad and the facility for non-residents to use rupee accounts. However, he still suggested caution.
The International Monetary Fund (IMF) was about to make this as a pre-condition for membership but then the East Asian crisis happened and countries which had full convertibility like Indonesia, Thailand etc took a big hit.
"Every time a global economic or financial crisis has hit, we have only gone back. I would say the prerequisites are a comprehensive regulation covering management and monitoring of the flows," said Anindya Banerjee, currency analyst, Kotak Securities.
In fact other committee members like A V Rajwade, a risk management consultant are today completely against it as they believe that in an independent monetary policy a liberal capital account and managed exchange rate cannot survive together.
"In my view exchange rates should be managed because they affect the real economy while floating exchange rate benefits the speculators in the currency market. Speculators want volatility. The IMF is biased towards liberal capital account and market determined exchange rates. I am of a different view because market determined exchange rates can fluctuate widely and they affect the real economy. Jobs are created in the real economy not by the speculators. Speculators gain and the real economy loses. IMFs own research shows that a liberal capital account does not in any case helps growth," he said.
