Daijiworld Media Network - Mangaluru (CLP)

Mangaluru, May 16: “Fiscal management and low inflation are key for full capital account convertibility," said RBI executive director G Padmanabhan at a conference on the topic ‘Is India Ready for Full Capital Account Convertibility?’ organized by Manel Srinivas Nayak Memorial Besant Institute of Post-Graduate Studies, Bondel at its premises, here on Saturday, May 16.

G Padmanabhan, executive director, Reserve Bank of India, delivered the key note address during the conference.

Addressing the gathering, G Padmanabhan said, “Are we ready for full capital account convertibility? In 1991, we saw many developments like currency crisis, global acceptance of the free market philosophy and so on. First and foremost, capital flows are sensitive to macro-economic policy. Therefore, a freely convertible country must have a sound, credible, and time consistent macro-economic policy. What does that translate operationally? It is translated into fiscal prudence and low inflation. Where do we stand in respect of these parameters? I wouldn't think we are very comfortable here."

“Both fiscal management and inflation have their own logic and dynamics in a large, diverse, developing country like India. How optimal will it be to throttle social expenditure and blow up interest rates just to attain capital account convertibility is a question. The second threat emanating from capital account convertibility is contagion of disturbance in the global financial markets. The brunt of this has to be borne by the domestic financial system. Though tightly regulated, the financial sector, particularly the banking industries surely not in the pink of health”, he added.

“Therefore the question of readiness for full convertibility has to be expanded to several related questions such as capital control retarding investment and growth of the economy. Is any social useful project unable to proceed beyond the drawing board because the entrepreneur is unable to raise resources either domestically or in offshore markets? What will be the incremental benefit of full convertibility that we are denying ourselves? What are the institutional and infrastructural developments we must have to reap the full benefits of further liberalisation of capital account? There is enormous literature and wealth of experience to provide the answer. The answer should be based on economic logic and on evidence and not derived from evangelism or what Bhagwati calls ‘Banner-waving’”, he further said.

“The first question India need to ask is why does India need capital account convertibility when empirical evidence regarding its impact on growth is mostly negative? The indirect effect, as argued by some researchers, is also not well established. The answer, to my mind, lies in fact that greater opening of capital account is inescapable as the Indian economy grows further and becomes global in dimension. A globalised economy, which the Indian economy is likely to become in the not too distant future, cannot afford to remain isolated for a very long period of time. Sooner than later, it will need to get closely integrated with full capital account convertibility, resisting liberalization over an extended period may prove futile and counterproductive. As the economy gets more globalized, it will become harder to maintain closed capital accounts”.

“Increased openness to international trade may create opportunities for circumvention of capital account restrictions through under-and-over invoicing of trade transaction and the increasing sophistication of investors and global financial markets makes it much easier to do so. 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 pre-conditions 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. Although these pre-conditions do stand met as of now, India has already made visible progress on these fronts”, he said.

In the conclusion, he said, “There are of course risks. But we need to accept these risks and move forward boldly while controlling the risk as far as practicable. If the experience of the developed countries is any pointer, sound policies, robust regulatory framework promoting a strong and efficient financial sector and effective systems and ensuring that such flows foster sustainable growth and do not lead to disruption and crisis. India has all these in place and we need to strengthen them. I wish all the actors in this story best of luck”.

Kudpi Jagadish Shenoy, president of the governing council of MSNM Besant institute, Manel and Annappa Nayak vice-president of the governing council of MSNM Besant institute were present.