The Telegraph
Since 1st March, 1999
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The economy has witnessed various shortages at different points in time. One characteristic of the Nineties has been the elimination of foreign exchange constraints. Draconian exchange control regulations through the Foreign Exchange Regulation Act have disappeared, FERA has been replaced by the Foreign Exchange Management Act and the rupee is almost entirely convertible on the current account. The issue remains one of capital account convertibility. A few years ago, the Tarapore committee recommended a roadmap and preconditions for capital account convertibility. If one interpreted that roadmap literally, the rupee should have become convertible on the capital account by now. However, the east Asian currency crisis (suitably misinterpreted) pushed back any such reform and the issue has again resurfaced in the last couple of years. The Tarapore committee had four preconditions — inflation rate, fiscal deficit, non-performing assets and cash reserve ratio to be reduced. Of these, there has been some movement on inflation rate and CRR, but the remaining two indicators are still fairly distant. But the Tarapore committee cited these preconditions as requisites for complete capital account convertibility and there is nothing to prevent phased liberalization. The trigger for reforms is the bloated foreign exchange reserves of 71 billion dollars. Whatever yardstick is used to measure the comfort of reserves, 71 billion is excessive.

In addition, given the excess supply of dollars, there is an upward pressure on the rupee, bad news for exporters. Hence the Reserve Bank of India has been buying up dollars, with implications for money supply and inflation. The finance minister chose the non-resident Indians summit to announce further liberalization on the capital account. There is nothing much for NRIs barring an increase in the repatriation threshold from the sale of property and other assets from 100,000 to 1 million dollars. The intention was more of persuading the NRI assemblage that India was serious about liberalization. Thus, mutual funds can invest in stock markets abroad up to 1 billion dollars. Earlier, they were restricted to debt instruments. The corporate sector can invest up to one-fourth of net worth, property overseas can be purchased for business or residence, the ceiling on stock options has disappeared, global depository receipts and American depository receipts can be retained abroad and exchange earners’ foreign currency accounts have been liberalized. Individuals can also purchase shares abroad, provided that such companies have equity of 10 per cent in domestic listed companies. There are at least 200 blue chip foreign companies that satisfy this test.

While the liberalization is welcome, the finance ministry’s objective of stimulating demand for dollars and thus neutralizing the upward pressure on the rupee may not work. Instead, capital account liberalization may stimulate the supply of dollars, given returns that can be fetched in India. While this amounts to doing the right thing for the wrong reasons, the reform move deserves appreciation.

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