People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
March 26, 2006
Shocked Over Govt’s Decision
number of prominent economists of the country have expressed, through a
statement issued from New Delhi on March 22, 2006, their sense of shock over and
opposition to the government decision to make the rupee fully convertible on
correct account. The text of their statement follows.
WE, the undersigned members of the economics profession in India, are shocked by the government’s eagerness to introduce full capital account convertibility. This move would imply that the inflow and outflow of capital by residents and non-residents would no longer be subject to any regulation.
would expose the Indian economy to extreme volatility since, in the event of a
capital outflow, it would no longer be only non-resident investors who would be
able to repatriate their funds, but also Indian residents who would be free to
take out any amount of domestic wealth.
outflows by local residents are precisely what had contributed to the massive
build-up of Latin American debt in the 1970s and 1980s. In Brazil, for example,
the total amount of the outstanding external debt in the beginning of the 1980s
was almost equal to the estimated capital flight by the resident rich. The costs
of servicing this debt and pursuing the conditionalities required to renegotiate
the debt were borne by the working poor. Similar outcomes of capital account
liberalisation have been observed in a host of other developing countries, such
as Turkey, Indonesia and Mexico.
should be noted that the Indian economy could insulate itself from the contagion
of the South-East Asian financial crisis in the late 1990s only because the
capital controls in place at the time prevented destabilising movements of
do not want the re-enactment in our country of a scenario in which the poor, who
are among the poorest in the world, have to pay the price for the unrestricted
freedom of the rich to shift their wealth out of the country
whenever it suits them.
gains to the economy from this move are nil. The argument that this is necessary
for attracting direct foreign investment does not stand scrutiny. The biggest
developing country recipients of FDI inflows (such as China today and Taiwan and
South Korea in the 1980s) have had major restrictions on capital flows. We know
from our own experience that portfolio investment inflows have no stimulating
effect on productive capital formation. On the contrary, they lead either to undesirable appreciation
of the exchange rate (leading to recession and unemployment) or to a mere
pile-up of foreign exchange reserves which actually involves the economy as a
whole borrowing dear and lending cheap.
to the government’s own pronouncements, the economy is currently doing very
well. In such a context, exposing the country to unpredictable movements in
capital flows creates a potential for fragility and crisis which is completely
avoidable. This is of particular concern because the stock market is already
experiencing a speculative boom.
urge the UPA government to desist from such an unnecessary and dangerous
to the statement include K S Krishna Swamy, Ashok Mitra, Amiya Bagchi, Nirmal
Chandra, Utsa Patnaik, D N Rao, Ritu Dewan, Jayati Ghosh, V K Ramachandran, C P
Chandrasekhar, Praveen Kumar Jha, Madhura Swaminathan, Prabhat Patnaik, Mahmood
Alam Ansari, Vikas Rawal, Parthapratim Pal, Prasenjit Bose, Atulan Guha, Smita
Gupta and others.