EDITORIAL

ROAD TO RUIN

SLOWLY but surely, the present government is pushing India towards a full capital account convertibility. In simple language, this means that all foreign currencies alongwith the Indian rupee can be freely exchanged without any restrictions. This measure was earlier recommended by the Tarapore Committee on financial liberalisation, but had been shelved after the crisis that crippled the South East Asian `Tigers'. Without saying so, the government is virtually implementing these recommendations.

Addressing the recent NRI gathering in the capital, the finance minister announced a series of measures that virtually integrate the Indian financial market with global capital markets.  This comes despite the fact that this very government had admitted, in the past, that India could stave off the financial crisis that engulfed South East Asia and Latin America precisely because it could insulate the Indian rupee from the "Casino culture" that dominates the global capital markets.

The government has announced on January 10 that companies with overseas offices will be allowed to acquire immovable property abroad; companies can retain their earnings abroad without any limit (at present, there is a limit of $10,000); individuals can invest abroad in companies; and so on.

Even prior to this, similar measures were quietly being undertaken. On November 1, 2002, Indian residents abroad were allowed to maintain foreign currency accounts in domestic banks. On November 18, the RBI doubled the foreign exchange available for foreign travelling. On December 12, banks were allowed to offer foreign currency-rupee swaps.  Domestic banks were permitted to invest any amount of money in oversees markets. 

All these put together constitute a package that is being justified by the government on the grounds that India's foreign exchange reserves have crossed $70 billion mark. Since this amount is more than a year's import bill, the argument goes that there need be no cause for worry. 

However, such a course is fought with disastrous consequences. For instance, while this foreign exchange reserve was accumulating, the trade deficit for the first eight months of this financial year has grown to $6247.65 million as compared to $5814.93 million for the corresponding period, last year. With the US's belligerent warmongering against Iraq, the international oil prices have been rising. This is bound to put a further burden on the negative balance of trade. Further, this package of financial liberalisation will encourage capital outflow creating conditions for the "capital flight syndrome" that had ruined the once relatively healthy South East Asian and Latin American economies. 

This ruination happened precisely because these economies had to increasingly depend on foreign capital inflows following financial liberalisation.  Such flows often dry up and past inflows could be rapidly repatriated. This is particularly true of speculative capital that comes in search of quick profits into the share markets. Following the crisis in the 1990s, it is being increasingly recognised that control and regulation of capital inflows are more significant in preventing potential crises. 

Indeed, if there is anything to be learnt from the experience of these countries, it is the following: In the background of foreign exchange accumulation, many of these countries embraced financial liberalisation under the presumption that these reserves would act as a cushion against global capital market fluctuations.  That such confidence was ill founded is today an obvious chapter of history.

Jaswant Singh has obviously brought the subservience to foreign interests that he pursued as the external affairs minister to the finance ministry. In the process, he is also facilitating the stacking away of funds, earned through loot and sleaze, abroad.