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Journalism of Courage
In a statement carried in the latest issue of the People8217;s Democracy, entitled 8216;Economists shocked over government8217;s decision8217;, 160 economists have opposed the prime minister8217;s proposal to make the rupee fully convertible on the capital account. It is certainly very interesting to know that India has 160 full-fledged economists, something even the US might envy.
Sadly, their opposition to convertibility is based on the flawed argument that it is dangerous because it would make Indian residents free to take out domestic wealth and such 8220;outflows by local residents are precisely what had contributed to the massive build-up of a Latin American debt in the 1970s and 1980s8221;. When a currency is made convertible on the capital account and local residents take money out, they acquire foreign assets, not liabilities. Indians will be able to hold an internationally diversified portfolio. India8217;s external debt, in any case, has been effectively managed after liberalisation, with the debt to GDP ratio declining from 32 per cent to 19 per cent. Moreover, it is clear to all economic observers that big companies already borrow abroad and wealthy individuals hold assets abroad. If there is lack of convertibility it is for the honest resident Indian and small firms. Among those who benefit from controls are the FIIs 8212; the incumbents who are making millions of dollars from running businesses like 8220;participatory notes8221; which they would lose out on once everyone is allowed to buy Indian stocks. The FIIs benefit from the policies of controlling capital flows to control the volatility of the rupee. Normally FIIs would have to hedge their currency risk. Today this is being done by the RBI at the cost of the Indian tax payer, something that would become impossible to do once the capital account opens up.
Now why these economists are supporting FIIs is a mystery. Or, is it merely that they are expressing solidarity with the RBI staff union, another group that has taken a strong stand against full convertibility?
