Column : Tobin tax is only for textbooks

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: Finance minister Pranab Mukherjee has laid to rest speculations about India imposing capital controls in the face of rising capital inflows. In a recent statement, he clearly said that while the government would monitor the inflows, India is not planning to impose restrictions on capital inflows in the near future.

The first question that should be asked before a meaningful discussion on imposing restrictions, is about the magnitude of capital flows to India today. The latest balance of payments data is available for the quarter April-June 2009. Net capital inflows in the quarter were $6.7 billion. This figure is a fraction of the inflows in late 2007 and early 2008 when they reached highs of more than $30 billion per quarter. When we compare foreign inflows today to the two quarters following the financial meltdown, when they were negative, they appear large. But when seen in historical perspective, inflows are, in fact, quite moderate.

Further, if we look at the components of capital flows in April-June 2009, the largest component was foreign direct investment, at $9.4 billion. This was followed by FII investment at $8.2 billion. The usually worrisome factor, loans, have not bounced back. As a consequence, we saw negative numbers for some categories with net loans outflow of $3.3 billion and net banking capital outflow of another $3.3 billion.

In the past, an inflow of capital has been a cause of concern for RBI. One of the main reasons for this was that RBI was trying to prevent rupee appreciation. When the rupee was touching Rs 40 per dollar, there was pressure from exporters to prevent further appreciation. Today RBI’s concerns are quite different. The central bank is faced with the difficult task of trying to boost growth and keep inflationary expectations under control. Were it to raise interest rates, growth could suffer. Were it to lower them, inflationary expectations could flare.