Don146;t be afraid

You can8217;t be afraid to become an economic powerhouse. This lesson of liberalisation hasn8217;t quite been learnt in this country. Which is why the prime minister reopening the debate on capital account convertibility is so welcome. We used to be afraid of trade liberalisation. Now, a current account surplus has turned into an easily financed deficit, and that is a sign of economic vitality. We used to be afraid of FDI 8212; remember the Bombay Club. Now, we can8217;t have enough of it. But the fear factor still rules. FDI in retail is caught up in a maze of false arguments.
The fear over capital account convertibility is all the more unreasonable because the rupee is convertible in the current account already, it is partly convertible in the capital account and fully convertible for those willing to break the law. The coincidence of the East Asian crisis 8212; a crisis brought about by the currency manipulation of central banks, not convertibility 8212; with the publication of the Tarapore guidelines allowed conservatives to freeze the issue. As it happens, all the preconditions for the Tarapore formula are now met 8212; low inflation, comfortable hard currency reserves, improvement in the fiscal situation, and so on.
The fear now is that large sums of money will flow out of the country if everyone is legally allowed to buy assets abroad without any limits. That apprehension makes a mockery of India8217;s current economic strength, the opportunities it offers. We should rather be thinking that Mumbai cannot become a world-class financial centre unless foreign companies are able to buy and sell their shares on Indian markets; and foreign governments, able to raise loans in rupee denominated bonds. The debate should cut to chase: full convertibility means RBI giving up its manipulation of the rupee because it would be impossible to manage the currency volumes that would then be in play. Indeed, currency control and the sharp market breaks that it creates are precursors of capital flight 8212; so let us be afraid of those afraid of convertibility.