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Left loads ammo on free rupee

Left loads ammo on free rupee

india Updated: Sep 04, 2006 03:49 IST

The Left is gathering support from unlikely quarters — the International Monetary Fund (IMF) — to strengthen its critique against Capital Account Convertibility (CAC).

The CPM is currently studying an internal India-specific report of the IMF, which says that foreign direct investment (FDI) has fallen to about 10 per cent of the total private capital inflows.

“However, portfolio investments (or investments in the share market or foreign institutional investments (FIIs)) …now account for about one-third of total private capital inflow…portfolio inflows are more volatile than FDI, growing reliance on such flows to finance the current account deficit leaves India more susceptible to reversals,’’ says the report titled “India-Staff for the 2005 Article 1V Consultation.”

Sources in the CPM argue that more investment in the FII sector combined with CAC would make the country vulnerable to a currency crisis. “FDI entails investing in producing units, new factories, increasing employment. Factories can’t be closed down overnight. But investment in FIIs is more volatile and speculative. If restrictions are lifted, and an investor is able to withdraw money at will, it could lead to a disaster,’’ sources said.

The second report being looked at by the CPM is a paper written jointly by Eswar Prasad, Raghuram Rajan, and Arvind Subramanian – three senior economists working for the IMF – and presented at a conference organized by the Federal Reserve Bank of Kansas City, on August 25.

Their views expressed, however, were personal. “..in the long run, capital account opening is unlikely to help poor countries grow by providing resources in excess of what available in the domestic economy – notwithstanding examples of foreign capital led booms and busts – though it may help in other ways. Foreign capital is no panacea for capital-poor countries,’’ the paper points out.

Left-leaning economists are also in the process of writing a detailed note on the subject to be sent to the Reserve Bank of India Governor, Dr YV Reddy. The note is likely to be sent to Reddy this week.