One had assumed that this was just a tentatively stray remark by the Prime Minister, namely, that he had asked the Finance Minister to re-visit the issue of capital account convertibility of the Indian rupee. However, the Finance Minister seems to have been undiplomatically frank in confessing that it has already been decided to announce the full capital account convertibility even before the Budget, but the announcement was held up because of lack of time. I am amazed that such a controversial and risky financial policy should be sought to be adopted even without the courtesy of public discussion and which also shows a contemptuous disregard for the Parliament. The Left Parties should seriously ponder whether their bark has not completely lost the bite.
It is unfortunate that the Government seems to have forgotten so soon, the terrible economic crisis which engulfed the East Asia a few years back when the countries went into an economic cesspool from which they have not yet fully recovered.
The main cause universally acknowledged was the villain in the shape of free capital convertibility of the currencies of those countries. It is well known that the vampire of globalization becomes more and more hungry as it spreads its fangs for its search for new markets by developed world, due to improved technology and the shrinking markets at home, which has reached saturation point in the profit oriented economy of industrialized countries. In the era of absence of colonies, industrialized world has to find an economic and philosophic jargon to justify the incursion of foreign capital into developing countries.
I do not know as to what has happened so suddenly that the Government is in a tearing hurry to go in for capital convertibility. The normal Indian tourists or business men have no problem in getting the requisite foreign exchange on legitimate visit abroad. So far as foreigners are concerned, the tourists have no problem, and the investors who wish to invest in India have also no problem, because the Government is admittedly very liberal in giving permission to bring in foreign currency, so much so that it is now thinking of seriously permitting investment in retail business which would inevitably result in the ruination of millions of small retail shopkeepers.
It will of course be a boon to the smugglers and black-money operators, who could on the quiet convert their ill-gotten money in foreign exchange and deposit it in Swiss Banks and others.
It will also enable the smugglers and terrorists to openly walk in to any money changer booth and ask for millions of foreign exchange to be converted into Indian Rupees to be utilized the way they like without the Government even coming to know of it or having scent of it. At present, because of the controls, it is a risky business to do so. But if there is free convertibility, a check will become impossible with necessary adverse consequences.
It will of course benefit the foreign speculators who wish to make quick money by any devious means on our stock exchanges. Such money that comes is like hot money with the sole motive to make quick profits and get out of the country, leaving behind the tragedy of ruined economy.
That this is no sick fantasy would be obvious to anyone if he only recapitulates the lessons of East Asian currency crisis with its ruinous impact some years back. Asian Tigers was held up as a model for Indian development mainly by permitting unrestricted foreign investments and some apologists warmly canvassed for full convertibility of Indian rupee. This insidious propaganda had almost enveloped most of our Ministers and officials and one looked with trepidation at the consequences, when suddenly because of the unfortunate currency crisis of East Asian Tigers, we stepped back and the rush for downhill was temporarily halted (of course the fight has not been finally won).
The then Prime Minister of Malaysia had openly blamed the currency crisis on the international financiers like George Soros, whose speculation in the foreign currency resulted in virtually destroying the Indonesia rupiah and forced the Hong Kong authorities to spend a billion US$ in the open market to shore up the local dollar.
The Wall Street Journal grudgingly accepted that India was able to somewhat withstand the global economic crisis because of the fact that India never gave its citizens and banks, open access of foreign money, and therefore it was somewhat insulated from the tendency of foreign financial markets to push currencies to the extreme.
Mr. Paul Krugman, U.S. economist was forced to welcome the steps by which Malaysian Government banned the trading of its currency in overseas markets effective immediately by freezing the country’s external account, the pool of ringgit owned by foreigners. The Central Bank of Malaysia also ruled that transfers of funds in these accounts would need its prior approval. It also announced that all settlement of exports and imports would be made in non-Ringgit currencies and restricted the amount Malaysians could hold in foreign currencies. It also changed its rules to say that proceeds from the sale by foreigners of any Malaysian assets, including securities or property, must remain in the country for one year before it can be remitted abroad, unless Bank Negara approves. This resulted in the Ringgit, strengthening to 3.88 against the US dollar.
Mr. Fidel Ramos, former President of the Philippines commented that “one must sympathize with Kuala Lumpur’s efforts to defend itself from what it sees as a kind of global laissez-faire capitalism which is going out of control”. United Nations Trade and Development Agency accepted that “Controls will remain an indispensable part of developing countries; armory of measures for the purpose of protection against international financial instability”. It further cautioned of the danger of speculative attacks on currencies and pointing out the difficulty of insulating countries against it, which are often triggered by external events such as the rise in US interest rates.
We as a growing economy must be able to see the danger of switching over to free capital convertibility which is a sure recipe for an economic disaster. Our Constitution is imbued with the philosophy of economic growth with social justice. The implementation of this cannot be left to the market as it is widely acknowledged that market is not friendly to the poor. Positive governmental actions are called for. Currency control is one of the basic tools for development of economic growth with equity underlying our Constitution.
