NEW DELHI: Expressing strong opposition to the move to introduce full capital account convertibility, the Communist Party of India (Marxist) on Wednesday demanded that the decision to form the S.S. Tarapore Committee to chalk out a road map for it be rescinded.

Reacting to Prime Minister Manmohan Singh's announcement in Mumbai, the CPI (M) termed it as a significant departure from the Common Minimum Programme. It said the CMP, far from advocating capital account convertibility, is committed to reducing the "vulnerability of the financial system to the flow of speculative capital."

Disagreeing with the view that the "comfortable" position of the Indian economy, both "internally and externally," warrants a "revisiting" of capital account convertibility, the party Polit Bureau said in a statement that it was shelved after the contagion of severe currency crises hit the South-East Asian countries in 1997-98, from which India could insulate itself only because of the extant capital controls.

More harm than good

Following the experience of successive financial crises in countries such as Mexico, Russia, Brazil, Turkey and Argentina, besides South-East Asian countries over the past decade, it is now widely held within policy circles in developing countries that full capital account convertibility, which allows any entity to transfer their funds at will in and out of a country, causes more harm than good.

Out of the foreign exchange reserves of $ 143 billion currently being held by the Reserve Bank of India, $ 44 billion, that is over 30 per cent, is on account of the FIIs. External Commercial Borrowings by domestic companies have also risen steadily to nearly $ 15 billion in 2005-06. According to the RBI, the ratio of volatile capital flows (defined to include cumulative portfolio inflows and short-term debt) to reserves, which was 36 per cent on March 2004, had increased steadily to 40.5 per cent in September 2005. In contrast, the share of net FDI in total private capital inflows was around 10 per cent. Far from generating any sense of comfort, such rising proportions of volatile capital inflows increase the possibility of financial turbulence.

"In fact, the combination of an unsustainable stock and real estate bubble fuelled by `hot money' inflows, currency appreciation and a widening current account deficit, being witnessed in India currently, looks eerily similar to the situation prevailing in the South-East Asian countries in the period preceding the currency crises of 1997-98.

Introducing capital account convertibility at this stage would further encourage such speculative inflows and reckless commercial borrowing," the statement said.

It said the UPA Government's tendency to "gratify the speculators" was evident in the decision to abolish the long-term capital gains tax in its 2004 interim budget.

The lure of tax-free speculative gains have attracted billions of dollars of portfolio investments into the Indian capital markets over the past two years, which in turn has led to an unprecedented stock market boom. FII equity holdings currently comprise over 13 per cent of market capitalisation in the Indian stock market in contrast to less than 3 per cent in China.

This increased risk within the country's financial system and had the potential of hurting the common people, who would have to bear the brunt of adjustments once the boom came to an end. Besides, increasing the number of billionaires in India, that too not through entrepreneurial profit but through untaxed capital gains, this massive inflow of portfolio investments does not have any positive impact on the productive sectors of the economy.

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