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Every
now and then, someone or the other from India initiates de-bate
on Capital Account Convertibility (CAC). This time it has
come to the turn of the Prime Minister when he said: "I
have requested Finance Minister and the Reserve Bank of India
to revisit the subject and come out with a road map on CAC
based on current realities." The surging Forex reserves
that have today touched US $154.2 bn is perhaps, what he had
in mind when he said "based on current realities".
Before getting deep into the debate let us see what economists
have got to say on CAC.
CAC
simply means freedom to a resident to convert his local assetsbe
it physical or monetary into foreign assets and vice versa
at market-determined rates of exchange. Market-oriented economists
putatively advocate CAC for a plethora of benefits: it maximizes
the efficiency in the use of capital across the world; it
enlists macroeconomic discipline and, thereby, makes capital
markets behave and respond to such policy shifts; compels
governments to supervise financial systems and regulate them
well; eliminates discretionary powers of bureaucrats that
in turn can eradicate corruption from the corridors of the
financial system and, finally affords freedom to individuals
to dispose of their income and wealth as they deem good in
their interest. In fact, in 1998, Fisher predicted that no
one could avoid embracing capital account liberalization as
all the most advanced economies of the world are already with
open capital accounts and it is only a question of time before
the rest liberalize their capital account transactions.
But
the Southeast Asian financial crisis simply put the "Capital
Account Convertibility" on the backburner. It shifted
the emphasis to caution. Critics, armored with the fall-outs
of the Asian crisis, have argued that capital control is the
most wanted mechanism to mitigate volatility in international
capital markets and to maintain the autonomy/sovereignty of
national policy.
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