NEW DELHI: The Indo-American Chamber of Commerce (IACC) on Wednesday said the roadmap for capital account convertibility of the rupee should necessarily focus on four critical areas — timeframe for bringing the fiscal deficit under a manageable limit, tight leash on inflation, comfortable foreign exchange reserves and a pragmatic ratio of international trade — exports and imports to the GDP.

The IACC felt that the fiscal deficit — of both the Centre and the States — was now ruling between 8 and 9 per cent, which was more than the benchmark figure proposed by the Tarapore Committee in its earlier report. The chamber said immediate steps need to be taken to bridge the resource gap. Focused attention should be given to privatisation programmes.

Closely linked with the reining in of fiscal deficit is the management of inflation, which now ranges between 5 and 6 per cent on an annualised basis. Inflationary pressures, beyond what the economy can absorb, can create distortion like what had happened in the Southeast Asian economies during the meltdown.

This led to people converting their assets from local currency to dollars because of the steady erosion of the value of the local currency, the chamber reminded.

The third important factor that has to be attended to is the ratio of international trade, that is, exports and imports combined to the GDP. This ratio is improving in the Indian context. But one has to see whether there is any pent up demand for imports, particularly for goods and services, which enjoy a measure of protection through higher customs duty. That can be assessed only when the customs duty structure is brought at least on a par with the ASEAN level.

A comfortable foreign exchange reserves is also important before switching over to capital account convertibility. In anticipation of a likely surge in dollar withdrawals, particularly immediately after the announcement of the decision to switch over to the capital convertible regime, it is necessary to keep a safe buffer of foreign exchange reserves to fall back on.

According to the IACC, there has to be a proper sensitisation programme carried out to educate the people about the implications of the capital account convertibility regime to remove some misplaced apprehensions from farmers and the manufacturer group about import surge after the capital account conversion.

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