Opinion - Editorials   

Revisiting capital account convertibility

The Reserve Bank of India has acted swiftly on Prime Minister Manmohan Singh's suggestion to revisit the issue of full convertibility for the rupee by appointing a committee under the chairmanship of former Deputy Governor S.S.Tarapore to suggest a road map. It is highly unlikely that the committee's report, expected by July end, will deviate substantially from the core principles on which another high level committee in May 1997, also headed by Mr. Tarapore, based its recommendations for rupee convertibility. That is because capital account convertibility can only be a gradual process, with macroeconomic consolidation being a key pre-requisite. In fact a recapitulation of the signposts that the first committee had prescribed, to be reached over a three-year period ending 1999-2000, would show how elusive the goal of convertibility can still be, notwithstanding the commendable progress achieved. Among the important goals set by it were reducing the gross fiscal deficit from the then 4.5 per cent of the GDP to 3.5 per cent and bringing down the inflation rate to a range of 3 to 5 per cent. The committee had also recommended that financial sector reform should be speeded up to make the institutions and the markets both competitive and transparent enough to withstand the consequences of a full convertibility regime. Almost nine years after the first road map was drawn, the signposts have not been reached. Fiscal consolidation is set to be achieved only by 2009. The central bank does not target inflation as its overriding objective. The WPI inflation is currently around an apparently comfortable level of 4 to 4.25 per cent only because retail fuel prices have been artificially kept down. The second generation financial sector reform is proving more difficult to be implemented. Pressing reform issues of the day that have become controversial include, for banks, the means to achieve capital adequacy to meet the Basel II norms.

With such weighty issues of macroeconomic consolidation and economic reform still waiting to be resolved, it is almost certain the new road map would re-emphasise gradualism. In fact conferring full convertibility status ceased to be a priority since 1998, after many East Asian nations learnt the hard way. Their currencies collapsed as investors and speculators fled to safer havens. India could remain unaffected by the contagion then only because it was less open and not vulnerable to capital flight. However, the reasons for renewed interest in the subject are not hard to seek. A move towards convertibility signals confidence in the economy, a recognition of the fact that, although the goals of macroeconomic consolidation have not been attained, substantial progress has been made. Hence whatever time-bound road map the new committee might draw up, it will most certainly involve a stocktaking of the achievements so far and the tasks remaining unfinished. For the economy, the journey towards convertibility might be as rewarding as the eventual attainment of the goal.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Revisiting capital account convertibility
Back to square one
Privatisation: come hell or high water
India's water and sanitation challenges
Corrections and clarifications
Two British-Indians in cash-for-peerage row
Who's stone age, U.K. politicians or bushmen?
Model Code
Unfortunate
Shocking
Judgment revisited

Copyright © 2006, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu