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The IMF has bowed before the wind. Its interim committee has virtually endorsed the use of capital controls in times of crisis. According to its communique, ``temporary impediments to capital movements have been utilised under certain circumstances, and in this regard, the committee has asked the board to review the experience with the use of controls and the circumstances under which such measures may be appropriate.'' This is a recognition of the havoc that currency speculation can play on the external accounts of countries. The committee has also signalled a go-slow on full convertibility: ``It is essential to prevent participation in global markets from becoming a channel or a source of financial instability (in the domestic economy), with the risk of negative spillovers onto the rest of the world economy."
For India, IMF's stance is little cause for cheer. The Bretton Woods charter requires current account covertibility. This the IMF insists upon. Capital account convertibility is an issue left to thenational governments; the IMF accepts this while adhering to its goal of full convertibility. The question is, will capital controls mean import control or enhanced protectionism? The answer is, not quite. The World Trade Organisation (WTO) will advance free trade, and countries like India have to adhere to the commitment to import liberalisation by 2002. So, it is not exactly clear why finance minister Sinha is reportedly crowing about the triumph of the India line. The fact is that the IMF is responding to the East Asian meltdown and to the trouble brewing in Latin America. Given the endemic deficit in India's (foreign) merchandise trade, there was no question of pushing India into full convertibility. It was only P Chidambaram (Sinha's predecessor) who talked glibly about accelerating the advance to capital account convertibility.
The precise gain from full convertibility has not been debated in India. There is vague optimism that this will enhance the inflow of foreign capital. The trouble is thatforeign portfolio investment (which enjoys capital convertibility) has only added uncertainty to the exchange rate and to the secondary market for equities. If foreign direct investment is not burgeoning, the reason is not partial convertibility, but the tardy pace of internal liberalisation. If life could be made easier for the private investor, foreign and domestic investment would rise. Furthermore, IMF's acceptance of the role of capital controls does not do away with the need to boost lethargic exports to pay for burgeoning imports; covering the trade gap with increasing foreign debt can spell trouble.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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