PM rules out Tobin tax

Prime Minister Manmohan Singh today ruled out the imposition of a tax on capital flows, referred to as Tobin Tax, saying that portfolio and direct investment into India were manageable.

“Tobin Tax has merit in particular situations but as far as India is concerned, we have not reached a stage where capital flows have become a problem. Capital flows into our country both by way of direct investment and by way of portfolio investment have been at reasonable levels. We don’t face situations of the kind which would require an imposition of Tobin Tax,” Singh told reporters.

Data released by the markets regulator, Securities and Exchange Board of India, showed that foreign investment in stocks had increased by $6.6 billion this year to an all-time high of $79.4 billion on June 24.

The problems in the Euro zone have slowed the pace of investment by foreign institutional investors in recent weeks but FIIs have made a comeback into the market.

In late April, when inflows were at their peak, Reserve Bank of India Governor D Subbarao had said there was no plan to put in place curbs to check excessive flows but the proposal was not off the table. Around that time, countries such as Brazil had put in place curbs on stock market flows as excessive flows were resulting in an appreciation of its currency.

In India, too, high inflows had resulted in the rupee rising to around 44.50 against the dollar in April. It closed at 46.21 to a dollar yesterday. Offshore forward contracts indicated the Indian currency would trade at 46.69 to the dollar in three months.

In the past, too, Indian authorities have considered the imposition of Tobin Tax but have refrained from moving on it. They have, however, resorted to putting in place checks on inflows through routes such as external commercial borrowings to check a steep appreciation in the value of the rupee. An appreciation in the local currency makes exports less competitive.