TCA Srinivasa-Raghavan: Of converted minds

OKONOMOS

It is only when the mind is colonised, wrote Gandhiji, that the coloniser's job is finally done. Indian economists, both of the right and the left persuasion, have had their minds colonised just about as comprehensively as Gandhiji's was when he used to refer to himself as a loyal soldier of the British Empire "" even to the extent of agreeing to send Indian troops to fight in Europe in 1917 and even though Jinnah was dead set against it.

Consider, in this context, the issue of capital account convertibility. Right-wing economists want it done NOW. Left-wing economists want it done 1,000 years from now. The problem, of course, is that only a few of them have a sense of history.

I would recommend to all of them, not merely that they their change their views, but simply that they talk more sensibly about it. A recent paper* by Mohua Roy, Director, Monetary Policy Department, Rekha Misra and Sangita Misra who are Assistant Adviser and Research Officer, respectively, in the RBI is worth reading in this context.

The paper makes a simple point: countries liberalise their capital accounts when it suits them to do so, not when it suits others to do so. Thus, the US did not fully open up until 1974, and Japan didn't till 1991 "" and immediately went into a slump. So did every other country after it opened up. The reason was capital flight after years of repression.

What capital controls do is to trap domestic savings within the geographic borders of the country and thus enable a higher rate of investment. When you open up, it is exactly like sending troops to Europe for fighting someone else's war.

Like others, India must do it gradually, and only what it deems to be in its self-interest, and not what assorted economists with their heads full of theory (not to mention fund managers who can make a quick killing) hector it to do.

*A Review of Cross-Country Experience in Capital Account Liberalisation, RBI Occasional Papers, Vol. 27, No. 1 and 2, 2006.http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/73531.pdf