- Wealth PMS
G. Padmanathan, ED at RBI, spoke about the concept of Rupee convertibility recently. He mentioned a lot of things against making the rupee “capital account convertible”. A concept that typically means foreigners can buy Indian assets and Indians can buy foreign assets without any control. He talks about the upsides – that everyone else is doing it, that it facilitates free trade, forces a country to have better economic policies and lower deficits etc.
Capital Mind‘s view on this is clear – we need capital account convertibility now. In fact, we needed it yesterday.
His objections, or what he calls “negatives”, of such convertibility are:
But of course, Mr. Padmanabhan probably understands the situation that the old guard might finally have to go. He says, in as much words, that convertibility is inevitable especially as our biggest partners are doing it, and demanding it:
…in fact that greater opening of capital account is inescapable as the Indian economy grows further and becomes global in dimension. A truly globalised economy, which the Indian economy is likely to become in the not too distant a future, cannot afford to remain isolated for a very long period of time. Sooner than later, it will need to get closely integrated with the rest of the world. While there are risks associated with full capital account convertibility, resisting liberalisation over an extended period may prove futile and counterproductive. As the economy gets more globalised, it will become harder to maintain closed capital accounts.
Increasing openness to international trade may create opportunities for circumvention of capital account restrictions through under-and over invoicing of trade transactions and the increasing sophistication of investors and global financial markets makes it much easier to do so. Transfer pricing is one of the methods which corporates may employ to get around capital account restrictions. In any case, keeping any restriction for too long is self defeating as people end up finding new methods of bypassing that restriction. So, India needs to continue moving towards full capital account convertibility. There is simply no escape from it.
It is a moot question as to how fast the movement should be. That will depend on how fast we can meet the most important preconditions like fiscal consolidation, inflation control, low level of NPAs, low and sustainable current account deficit, strengthening of financial markets, prudential supervision of financial institutions, etc. India has already made visible progress on these fronts. There are of course risks, but we need to accept these risks and move forward boldly while controlling the risks as far as practicable.
While I won’t bother labouring each point again, I welcome the suggestion that we must become fully convertible and that we must allow free capital transactions to happen because there is no alternative. My basic point is: if you don’t do it now, you will be forced to do in the middle of a horrible crisis.
You can put a tiger in a cage and show people how healthy he is, and how your care has ensured he isn’t attacked by other tigers which would have happened in the wild, or that the food you carefully choose for him is the best thing for him, considering empirical evidence from other caged tigers.
But the tiger prefers his freedom, and the world knows now that he doesn’t belong in a cage. I can’t get enough of Tina Turner’s song: We don’t need another hero. We don’t need to know the way home.