Prime Minister Manmohan Singh’s call to the RBI and the Finance Ministry to revisit the subject of full convertibility of the rupee and draw up a fresh roadmap for capital account convertibility is a clear signal of India’s growing confidence in its ability to take its rightful place among emerging economic superpowers. In theory, one can have effective capital account convertibility without the formality of a policy sanction. Yet, with the exception of China, most strong and well-administered economies place no restrictions on the flow of capital across their borders.
Twelve years ago, when current account convertibility was introduced, freeing restriction on payments for goods and services, the country was in a much more fragile economic state than it is today. Nevertheless, disaster failed to strike. In fact, current account convertibility became the springboard for accelerated growth. Prudent management by the RBI saw India riding out the South-east Asian financial meltdown. The timing of the PM’s call also demonstrates that far from bowing to external pressures, India’s policy-makers have actually followed their own timetable. The original path to capital account convertibility was mapped out nearly a decade ago. Instead of acting hastily, India’s fiscal managers have waited for the right time to make their moves.
With indicators pointing to the economy being able to sustain 8 per cent-plus growth levels and a comfortable foreign currency reserves of over $ 140 billion, a booming stock market and commitment to transparent fiscal deficit targets, the stage is ready for the next step. By declaring intention to eventually allow citizens to be able to invest in overseas assets, the move is a vote of confidence on the economy’s strength. Predictably, the Left parties have criticised the government for ‘giving in’ to the pressure of foreign governments and the World Bank. But India’s track record proves otherwise.