Prabhat Patnaik

NEW DELHI: Economists have urged the United Progressive Alliance Government to desist from the "unnecessary and dangerous measure" of introducing full capital account convertibility as it would deregulate the inflow and outflow of capital by both residents and non-residents and expose the economy to extreme volatility. In a press statement issued by Prabhat Patnaik of Jawaharlal Nehru University (JNU), over 160 economists from all over the country expressed shock over the Government's eagerness to introduce full float as such a move would expose the country to "unpredictable movements in capital flows" and create "a potential for fragility and crisis which is completely avoidable."

Latin American debt

In the event of a capital outflow, the statement said the danger was all the more as it would no longer be only non-resident investors who would be able to repatriate their funds, but also Indian residents who would be free to take out any amount of domestic wealth. Such outflows by local residents were precisely what had contributed to the massive build-up of Latin American debt in the 1970s and 1980s, it said.

Capital flight

Citing Brazil, it said the total amount of the outstanding external debt in the beginning of the 1980s was almost equal to the estimated capital flight by the resident rich. "The costs of servicing this debt and pursuing the conditionalities required to renegotiate the debt were borne by the working poor," it said, while noting that similar outcomes of full float on capital account were observed in a host of developing nations such as Turkey, Indonesia and Mexico.

The economists reminded the Government that the economy could insulate itself from the contagion of the Southeast Asian financial crisis in the late 1990s only because the capital controls in place at the time prevented destabilising movements of capital. Noting that the gains from the full float were nil, the statement said the argument that this was necessary for attracting foreign direct investment (FDI) also did not stand scrutiny. "The biggest developing country recipients of foreign capital (such as China today and Taiwan and South Korea in the 1980s) have had major restrictions on capital flows," it said.

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