For the second time in less than a decade, India has revisited the idea of making all Indians global citizens in the real sense of the term. If the recommendations of the Tarapore Committee’s report on the roadmap towards ‘fuller capital account convertibility’ are accepted, the pre-reform mindset will be well and truly buried. Citizens will be able, in five years’ time, to send up to $ 200,000 overseas, with sub-limits — like those on how much foreign exchange one can carry on an overseas holiday — lifted. They will be able to acquire property and financial assets and open bank accounts anywhere in the world. The topography of the economy will also change radically. Indian companies will be able to borrow a billion dollars abroad every year, without taking the RBI’s permission. Mutual funds and portfolio management schemes will be able to invest up to $ 2 billion in overseas stock. Indian companies will be allowed to invest four times their net worth abroad. Banks would be better placed to satisfy the booming domestic economy’s hunger for capital, by judiciously borrowing cheaper foreign funds up to 100 per cent of the value of their net worth and free reserves. Even the government would be able to tap a wider range of funds, with foreign institutional investors allowed to invest in up to a tenth of the total gross debt instruments issued by central and state governments.
By any yardstick, this is a courageous move. Fifteen years ago, the country had enough foreign exchange reserves to pay for a meagre 15 days’ imports, and had to pledge its gold reserves to tide over the crisis. Today, at a shade over $ 165 billion, India’s foreign currency reserves are comfortable, but pale into insignificance before China’s $ 941 billion, the world’s largest. Besides, a significant chunk of India’s reserves are in the form of foreign portfolio investments in Indian stock. Nevertheless, India’s prepared to tread where China has so far feared to.
The reason’s clear. China’s economy is surging at close to 12 per cent per year, fuelled by foreign investments. If the Indian economy is to clock 10 per cent-plus, it needs far greater inflows of foreign direct investment. Easing restrictions on capital flows would go a long way in boosting investor confidence and bring in capital on the scale needed to build India’s infrastructure to global scale.