Ficci Moots Caution On Fin Liberalisation
The Federation of Indian Chambers of Commerce and Industry (Ficci), in its background paper on the South East Asian meltdown and its impact on India, has warned that countries like India will have to approach financial liberalisation in an extremely cautious and measured manner.
The background paper has made two major conclusions based on the impact of the South East Asian meltdown on India. The paper states that while it will be grossly incorrect to dismiss the spectacular performance of the miracle economies over the past decades, an inescapable fact remains that the East Asian model of export has come under close scrutiny in light of the recent developments.
The chamber is of the view that slump in the markets for items like semiconductors and consumer electronics needs to be understood in the backdrop of not only a weak demand in industrial nations but also in the context of oversupply in the region.
The background paper has held China and Korea largely responsible for creating massive surplus capacity.
China and Korea are perhaps largely responsible for creating massive surplus capacity which, inter alia, brought about a downswing in exports price for Asia outside Japan, the paper states.
It further says that financial markets around the world are fast integrating into a single global marketplace, and developing countries cannot afford to remain outside the world system.
In the era of such global connectivity, which is being facilitated by advances in communications and information technology, countries like India will have to approach financial liberalisation in an extremely cautious manner.
Therefore, it is advisable to follow a prudent macro-economic policy for attracting foreign capital inflows, and build the right kind of legal, regulatory as well as supervisory structures so as to channel such inflows into productive avenues, the paper said.
The report has stated that the currency turbulence (particularly that of the baht) highlights the danger of a currency peg system in an era of free flows of capital. Further, as the Korean experience shows, instead of accommodating market pressures in a timely manner, the government deferred the necessary adjustments by defending the won.
The paper states that the impact of the East Asian crisis on India so far has been limited. Despite the net outflow of $ 385 million in the last three months, the rupee has remain comparatively stable, and the stock markets have been able to weather the storm.
It goes on to add that India has managed to escape relatively unhurt since it does not have a number of vulnerable characteristics that marked the crisis-hit south East Asian countries.
India's strong position is reflected in its modest current account, small proportion of short-term debt and low level of export dependence. India's financial sector, though beset with problems, is hardly fragile by east Asian standards. In comparison with their counterparts, Indian banks and financial institutions have less exposure to the real estate sector. Also, Indian corporates and banks are not as exposed to foreign debt, the paper said.
The paper states that in view of the crisis, there may be some uncertainties of the inflow of direct investment from Korea and the Asean countries.
which have turned out as a major source of FDI into India in recent times.