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Friday, Oct 06, 2006
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UPA responds to Left concerns

Special Correspondent

"No bar in CMP on examining issues for capital account convertibility'

NEW DELHI: The United Progressive Alliance Government has informed the Left parties that it has not taken a view on the issue of full capital account convertibility but there is no embargo in the National Common Minimum Programme on the examination of relevant issues for it.

Referring to the Left parties' apprehensions on financial sector liberalisation, in the form of stock market crash, role of foreign institutional investors, large-scale capital flight and move towards full capital account convertibility, the Government has responded to each of these issues.

In a detailed note to the Left parties at its Wednesday coordination committee meeting, the Government said movement in stock prices was a normal feature of any securities market and systems were in place to regulate excess volatility and protect the investors.

It said Indian securities market has given a return of 16 per cent in 2004-05 and 74 per cent in 2005-06.

`Fears misplaced'

The Government said apprehension about capital flight was "misplaced" and that the net FII inflows were around $10 billion in each of the last two preceding years. It said FIIs contribute only 13 to 14 per cent turnover on the bourses and doubts that FIIs wield considerable power in the market was also misplaced.

As per the NCMP, the Government continues to encourage FIIs but reduce the vulnerability of the financial system to the flow of speculative capital.

The Government has already placed on website a report of the expert group appointed to look into these issues including participatory notes for feedback and public comment. The note emphasised that the FIIs were subject to normal tax laws and subject to securities transaction tax as any other investor in the market.

As regards the S.S. Tarapore Committee report that suggested a roadmap on full capital account convertibility, the Government said while most of the conditions specified by the first report of the Committee were met, there was a need to revisit the subject and consider a fresh roadmap. Accordingly, the Reserve Bank followed a fresh directive from the Prime Minister to examine the issue afresh.

Russian example

"There is no NCMP embargo on the examination of the relevant issues for capital account convertibility. Russia has recently made the rouble fully convertible. China has announced that the Remninbi will be fully convertible in about two years, but after Russia's decision, this is expected to happen sooner," the note said.

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