Work for the Ninth Plan was in full swing in the second half of the 1990s. The United Front governments were of a socialist variety. I have never found the Left not amenable to radically different ideas. With Jagmohan as the chairman of the Parliamentary Standing Committee on the Distribution Bill, which I had as power minister moved in Parliament, we were able to get an inter-party parliamentary committee to unanimously approve privatisation of power distribution systems with a strong social regulatory framework. The only big foreign investment in distribution of electricity?the distribution network for the Mangalore STPP?was signed, not to be replicated for a decade. In the draft plan note, I put forward the idea of capital account convertibility. This was, to me, the logical culmination of the vision (we saw with Rajiv Gandhi) of India as an economic giant in its own right. Then all hell broke loose. Even as sensible a finance man as Bimal Jalan, then in the Planning Commission after a stint with the IMF, was unhappy. Later as RBI chief he was to keep interest rates high during the Asian meltdown. We persisted and the Plan had a statement that restructuring for capital account convertibility should begin as the preconditions were exchange reserves, restructuring of financial institutions and lower revenue deficits. The Tarapore Committee was set up and the rest is history.
The East Asian crisis put a spanner in the works. Although there was an argument that India should not have kept very high interest rates since exchange rate fluctuations were so high that a percent or two would hardly have policy impact, exchange control did help India. That experience keeps haunting us and the same arguments are dished out ad nauseum. Isn?t this the time to think afresh? The best way of meeting an argument is not to demolish a straw man but to seriously engage the best arguments in the field. In this case it is Venu Gopal Reddy, who, as then-governor of RBI, reflected many times on this concept. The last major intervention on his part I know of is his speech to the Indian Econometric Society at Hyderabad. I was there as a former president. Reddy started by saying that the problem of reform of managing capital flows is important, in other words no extreme positions can be taken. He, in fact, went further and made the plea, a positive one that reform needs many innovative policy responses. He made the point that my teacher Larry Klein always made?that reforming FDI and equity investment is different from freeing all capital flows. This, incidentally, is going far in the direction of external convertibility.
The argument against going further is the old one. First, our fiscal situation is in a mess with coalition governments living as if there is no tomorrow. Governors of RBI don?t use these words but are almost there. The second was volatility of external financial flows. On the first one, this column has been with the critics because that is the only way to give economic policies some elbowroom, but in a global comparative sense we are not doing that badly. I am a part of the OECD?s ?Define? network and it is quite clear that we are not using the techniques the others are using to create firewalls against sliding down further. After the customary obeisance to free trade, the use of presumptive taxation, inverted tariff policies, retaliatory NTRs and so on is pretty common. This column has made the point that India should push for a breakthrough in the Doha Round, beginning with the next meeting of the G-8, and more recently there is quite some empirical work to show the large benefits that can accrue from capital convertibility.
The moral, therefore, is that we need fiscal reform but others need it more, but are also not thinking about it on account of the fragility of their revival. Therefore, this is not an argument to go slow on capital account reform, since we are less badly off so to speak. This, in other words, means that the dilemmas are in terms of, say, keeping interest rates competitive but since the Indian economy is strong, the government can be more adventurous on the domestic side than others. Effectively, we have dilemmas in a globally competitive sense, at least for the time being.
The other point that Dr Reddy and scholars like Mihir Rakshit make is correct?that financial market development and improving the absorptive capacity of the economy are important long-haul problems. But as The Bard said, ?There is a tide in the affairs of men, which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows.? I would suggest the time is now to make the rupee another currency of the future. As I said when we did partial convertibility in the early 1990s, it won?t collapse. It has 400 million workers to back it up.
?The author is a former Union minister