It is not for the first time that the topic of full convertibility of the rupee, as capital account convertibility is otherwise called, has engaged policy-makers at the highest levels. Just this month the Reserve Bank of India (RBI) Governor Raghuram Rajan and the Minister of State for Finance Jayant Sinha have expressed the hope that India will move to full convertibility status sooner rather than later. Neither of them indicated definite timelines but, according to Mr. Sinha, a full convertibility of the rupee will enable India to play a positive and useful role in the global economy.
No policy announcements have been made, but the statements have stirred a debate on the possible moves towards convertibility. In many ways, there is a sense of deja vu.
The subject, when first mooted by the government in the 1990s, created plenty of unnecessary excitement with the very mention of full convertibility conjuring visions of ordinary people being able to open checking accounts in places such as Luxemburg without any restrictions whatsoever. But full convertibility is much more than that, and to understand it better one has to interpret terms such as convertibility of the rupee in relation to current account and how it differs from capital account. The Indian experience so far can be a guide.
Two points are very relevant here. Even experts agree that there can be no watertight division between current account and capital account convertibility. The distinction very often is a matter of semantics. Second, no country in the world has full convertibility of its currency, which, as we shall see below, involves unfettered capital flows in and out of the country.
In a full convertibility regime, money can freely flow in and out of the country with minimal restrictions. It needs to be stated here that for India, fully compliant on the current account, full convertibility remains a goal and the path towards it needs to be measured.
Expert groups, the two Tarapore Committees (1997 and again in September 2006), have defined road maps, where progress is to be measured in terms of the attainment of specific goals such as those relating to fiscal and current account deficits and inflation. The road maps drawn by the committees might not have been fully adhered to but there is no denying that much of India’s moves towards a fuller convertibility are based on the two reports.
The twin deficits — current account and the fiscal deficits — have posed problems, but over the recent past, the government of the day seems to have got a grip on these. The CAD has plunged from 4.8 per cent of the GDP in 2012-13 to 1.7 per cent during the next year. Fortuitous circumstances such as lower oil prices and curbs on gold imports (since relaxed) have no doubt helped. The size of the two deficits obviously matter in monitoring macro-economic balance. In fiscal deficit, the government managed to contain it at 4.1 per cent but the recommended target of 3 per cent of the GDP has been pushed back by a year. India’s growth prospects will naturally weigh with the policy- makers. The prospect of a less than satisfactory monsoon for the second year in succession is not good news. On a brighter note, inflation appears to be firmly under control. A healthier public sector banking system is obviously another prerequisite.
The above are some of the macro-economic goals that the Tarapore Committee had recommended. It does not matter that the timeframe suggested by the committee could not be adhered to. The reports brought in a measure of realism to the debate over convertibility.
The reason why the Governor and the minister dwelt on the subject may have to do with drawing attention on the host of issues that need to be tackled for India to march ahead towards convertibility.