New Delhi: India is clearly heading towards a more open capital account and there was no question that more financial sector reforms are necessary, a top government official said in an interview published on Friday (2 November).
And while the pace of growth in recent years had surprised, average growth may only slightly increase to 9% over the next five years because of some cyclical correction, Montek Singh Ahluwalia, the deputy chairman of India’s Planning Commission, told the McKinsey Quarterly Review.
“We’re clearly heading toward a more open capital account, but we’re not doing it in one go,” he said.
“There are people who argue that government should declare that it would remove all capital controls in a defined, relatively short period -- say, one or two years.
“Others argue for steady movement over a more extended time frame, putting in place the necessary preconditions first. The government is considering these proposals but has not taken a firm view on the issue.”
Rupee has been convertible on the current account since 1994, meaning it can be changed freely into foreign currency for specific purposes like trade-related expenses.
It cannot be converted freely for activities such as buying overseas assets. The RBI has a three-phase plan for greater convertibility by the end of the 2010/11 fiscal year.
The RBI has taken several steps, such as raising the ceiling on overseas investment by Indian companies and mutual funds, towards this goal.
Still, authorities have been worried by a surge of foreign money into the economy that has accelerated since mid-September, and the finance minister has spoken of the need to moderate inflows.
The stock market regulator last month moved to curb the issuance of participatory notes, which give unregistered foreign investors access to India’s markets.
The economy has grown by an average of 8.6% over the last four years, which Ahluwalia said was better than he had expected. The economy grew 9.4% in 2006/07, its fastest in 18 years and second only to China among major economies.
“We are currently projecting an average growth rate of 9% for the next five years,” Ahluwalia said.
“Many people think that’s a bit underambitious, given it was 9.4% last year. But I think an element of cyclical correction is going to take place.” Reuters