Opinion Free the rupee
Let people move rupees. If they hoard it,that is a sign of its coming of age
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This is a story from the early 90s,when the Russian economy was being reformed,but had not quite been freed. The international airport was in Sheremetyevo,the domestic airport in Domodedovo. The distance between the two was almost 70 km and a taxi ride cost around $30. However,air fares were administered and one could catch a flight from Sheremetyevo to Vladivostok and back from Vladivostok to Domodedovo for around $19. The flight option was cheaper than the taxi ride. Like several things,we have inherited Soviet and Russian legacies and continue to retain them. Consider the matter of the rupee. Once upon a time,the Indian rupee was accepted as legal tender in the Middle East,parts of East and South Africa,South Asia and even Australia. Thats no longer possible. The rupee isnt a convertible currency. What is the standard reform line? Beginning with 1991,and more since 1993,it is convertible on current account. We are waiting with bated breath for convertibility on capital account. In 1997,we were headed that way,but the East Asian financial crisis taught us the folly of hasty liberalisation. In 2006,we were again headed that way,but the global financial crisis taught us the folly of feisty liberalisation.
We are getting there,but one step at a time. Capital account convertibility isnt an overnight transition. There are few restrictions on capital inflows. As for outflows,we are gradually relaxing for corporate sector and relaxing somewhat more gradually for individuals. With the stupendous performance the economy will clock over the next decade,the rupee will appreciate. As things stand,it is appreciating because of capital inflows. However,appreciation is bad for competitiveness. Therefore,we must stimulate capital account demand to neutralise,but not so fast as to encourage speculation and volatility. We will do some stimulation of current account demand too,by reducing import barriers. Exchange controls are going. Indian companies can raise capital abroad,they can acquire companies abroad. Indian residents can invest in capital markets abroad. They can invest in property abroad.
Without making dysfunctional comparisons with China,we have excess forex reserves. India has become a net creditor to the IMF. In 1991,we had to sell gold. In 2009,we bought gold. That is a pretty powerful symbol. And there is an even more powerful symbol in the offing. The finance ministry has announced a design contest to devise a symbol for the Indian rupee,since Rs and INR are not quite symbols. Many currencies in the world,such as the US dollar,Euro,British pound and Japanese yen,have symbols. A symbol will increase the rupees acceptability and visibility and take it forward on the road towards complete convertibility. Pakistan will be tempted to counterfeit the rupee even more.
But liberalising reforms are essentially about capital account. The IMF doesnt require currencies to be convertible on capital account. The IMFs Article VIII only specifies avoidance of restrictions on current payments and we accepted these commitments in 1994. Consequently,the rupee is convertible on current account. Of course,there are thresholds,since the Foreign Exchange Management Act allows restrictions. Depending on the nature of the transaction,there are thresholds of $5,000,$10,000,$25,000 and $100,000,with a cash restriction of $2,000. Nepal and Bhutan are different. Other than those two countries,you cant bring in more than Rs 5000. Ipso facto,you cant take out more than
Rs 5000 either. (It has been increased to Rs 7500,but the notification hasnt surfaced yet.) Once you have crossed emigration,you are therefore in a soup if you have more than Rs 5000,irrespective of whether you are a resident or a non-resident. You cant spend it in duty-free. You cant convert it at the money-changer. Its your problem,since you should have known the law.
There is of course the Sheremetyevo-Domodedovo kind of option. You can take a flight to Singapore (or Dubai) and convert Indian rupees to US dollars and take a return flight back. One is not talking about the hawala market. Thanks to reforms,thats been undermined,except where it concerns drugs,arms and gold smuggling. At both Singapore and Dubai airports,money-changers will legitimately change rupees to dollars and vice-versa,at pre-announced buying and selling rates. Elsewhere in the world,the market has accepted the rupee as a convertible currency for current account purposes. The market will accept this in India too,provided the Soviet regulatory mindset changes. If you ask the RBI,pat will come the answer this ceiling exists because the rupee is not a convertible currency. Come again? What has convertibility got to do with it? For instance,if duty-free shops in India are allowed to accept Indian rupees,thats a current account transaction,just as payment through credit cards (invoiced in dollars) are current account transactions. At best,such current account transactions shouldnt exceed ceilings set. At money-changers before emigration,there is no Rs 5000 limit on the amount that can be converted into foreign exchange. One only needs to sign a FEMA declaration that the ceilings arent being violated. Therefore,convertibility is a red herring. We are talking about the regulatory mindset that foreign exchange is convertible and the rupee is not. The rest of the world may take pride in the rupee,but we do not,notwithstanding the finance ministrys proposed new symbol.
There is yet another point that is a red herring too. Once one has crossed embarkation and customs,one is technically no longer in the Indian customs zone. Therefore,payments should be in forex. However,Indian laws apply there too. If I commit a crime in that zone,I will be prosecuted under the Indian Penal Code,or whatever the relevant law is. And if there is a monetary penalty,I will pay in
Indian rupees. I cant be mandated to pay in forex. There was a time when food joints beyond embarkation/ customs didnt accept rupees. They do so now. Exactly similarly,once regulation is waived,markets for rupee conversion will evolve there too,subject to licensing controls over money-changers.
As one moves closer to budget day,there is pointless talk about big ideas in the budget. There cant be,certainly not on exchange control and forex liberalisation. As a quantitatively insignificant,but symbolically powerful,issue,why doesnt the FM announce that this Rs 5000 (or Rs 7500) ceiling will be scrapped and rupees freely accepted in what is really Indian territory? Let people freely take out and bring in rupees. If they hoard rupees instead of forex,that is a sign of the rupees coming of age. FEMA was enacted 11 years ago and we no longer need to manage the rupee that much.
The writer is a Delhi-based economist
express@expressindia.com
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