Markets: Eerie calm

Markets: Eerie calm

it is not clear when market sentiment can change; as in the past, it can be quite sudden.
At a turn and yet not

At a turn and yet not

RBI could be tempted to cut policy rate to support growth at its bi-monthly review.

Column: Open up the capital account

Mar 15 2014, 02:49 IST
Comments 0
SummaryIndia needs to let go of needless controls while allowing the global financial system to adapt locally

India's path to capital account convertibility will be an important question for the new government. Left thinkers have attacked financial globalisation, pointing to the risks it brings to emerging economies, especially after the financial crisis. For the new India with world class multinationals, with a skilled labour force and the potential for becoming an international financial centre, the Left arguments perpetuate backwardness. The next government needs to move forward with rationalisation, liberalisation, removal of bureaucratic overhead, and establishing the rule of law so that Indian companies and citizens have greater freedom to manage their finances and access to world-class products and lowest prices. Missteps on this process will generate shocks to the exchange rate and to the economy.

India has a large and complex system of permanent and pervasive capital controls. Numerous agencies have been given powers to interfere with cross-border transactions. It is often not clear why certain controls are in place. For India to succeed, the relevant question is: How to open up sensibly?

The first element for policy is the hygiene of good governance. The principles of transparency, accountability and rule of law, which have gained prominence across all parts of the working of the state, are equally relevant here. Across the landscape, there is unhappiness about the bureaucratic overhead faced in doing simple things—it is time to slash the red tape and simplify procedures. This is just the hygiene of sound public administration. The government is in the process of voluntarily implementing the governance-enhancing features of the Indian Financial Code that was drafted by Financial Sector Legislative Reforms Commission (FSLRC). These will yield major gains when applied to the working of capital controls.

Percy Mistry, whose report argued for making Mumbai an international financial centre, has long reminded us that there are no accidents on a village road not because the traffic police is effective, but because there is no traffic. Whether we should have financial globalisation is no longer a question for India. The question now is: How can we open up to the world and, at the same time, undertake measures to become strong and

resilient? For example, steps to increase the liquidity of derivatives markets, removing caps on rupee-denominated debt and enabling firms to hedge their foreign currency exposure will make the economy more

resilient. Engagement with the world introduces new risks—and the best way to deal with those risks is to have deep

Single Page Format
Ads by Google

More from Edit & Columns

Reader´s Comments
| Post a Comment
Please Wait while comments are loading...