Imc Warns Against Rushing Into Full
Indian Merchants Chamber (IMC), in a memorandum to the S S Tarapore Committee appointed by the Reserve Bank of India (RBI), has warned against rushing into full rupee convertibility on capital account.
In the memorandum to the committee constituted to lay a road map and set speed limit for the countrys journey towards full convertibility, IMC said, the big bang approach to capital account convertibility is extremely dangerous and if rushed through hastily, it will open the floodgates for flight of capital.
Though capital account convertibility was an essential economic goal, the government should adopt a gradualistic approach towards the goal, the chamber suggested, adding that such an approach should depend on India achieving certain basic macro economic parameters, rather than on any blind ideology. Current account convertibility should be made more effective before moving on to capital acco -unt convertibility and further flexibility should be facilitated in the area of capital flows to banks as well as to business and industry.
India is far from a scenario of sustainable growth, which is an automatic route that generates plentiful employment and revenue, the memorandum stressed.
Underlining that capital account convertibility was irreversible, it urged that reforms in major sectors be taken up speedily so as to place the economy on the path of sustainable growth.
The memorandum pointed out that volatile funds constituted a significant portion (40 per cent) of Indias foreign exchange reserves. The Indian Merchants Chamber said though the proclaimed aim of capital account convertibility was to encourage foreign exchange inflows, sustained forex inflows did not depend much on this proposed move.
On the contrary, it pointed out, sustained forex inflows would depend on mainly the performance of Indian economy, interest rate differentials and other factors Imc said adequate safeguards and early alternative policy frameworks ought to be built against legitimate concerns.
For instance, in case of excess inflows, the government should have a policy for deployment of foreign exchange reserves and a strategy to counter inflationary forces.