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BJP likely to delay capital account convertibility

The Bharatiya Janata Party-led coalition government appears to be against introducing anytime soon convertibility on the capital account, which envisages free movement of capital in and out of the country. This was indicated by Finance Minister Yashwant Sinha at a press conference in Washington DC on April 17.

In reply to a question, Sinha said he was not in a position to give any definite timeframe within which such a step would be taken. The committee, set up by the government to advice on the issue, had laid down several preconditions before the introduction of capital account convertibility which implies freedom from controls -- quantitative taxes and subsidies -- that affect capital account transactions between residents and non-residents.

Sinha said one of the preconditions was to bring down the fiscal deficit to the level of three per cent of the GDP and, at present, it was over six per cent. "Therefore, it is not an appropriate time" to go in for the capital account convertibility, he added.

The minister touched the issue in his speech at the Interim Committee of the International Monetary Fund, arguing that the East Asian monetary crisis suggested that the sequencing and speed of progress toward this goal must take due account of country-specific parameters relating to macroeconomic fundamentals, the fiscal and financial systems, as well as institutional and legal issues."

He said the crisis had demonstrated that in the absence of a lender of last resort in the world economy, it was vitally important to calibrate progress toward capital account convertibility in step with progress in achieving the preconditions of strong macrofundamentals and a sound financial system.

The IMF is a great champion of the convertibility, believing that free capital movement helps channels resources into their most productive uses and thereby increase economic growth and welfare.

Sinha disapproved the World Bank's decision to commit $10 billion dollars in structural adjustment aid to South Korea which, in his view, should have been taken care of by the IMF. The bank should stick to its original mission of lifting countries out of poverty and not assume the additional role of crisis management, he added.

"We hope that in future there would be no occasion for the bank to commit funds like it did to South Korea," he added.

The bank's contribution was part of a $58 billion rescue package spearheaded by the IMF in December 1997. Half of the World Bank's $10 billion loan has been disbursed.

The finance minister said he had raised the issue at a meeting of the Developing Committee of the Bank earlier in the day where other Third World nations supported his stand. His argument was that the burden of the Asian crisis should be not be carried by emerging economies alone.

"For every borrower there is a lender. Responsibility should also fall on the lenders," he remarked.

Sinha believed that the Bank had enough resources to carry out its activity without charging borrowers market rates for developmental projects. "There is no point of being market driven. All the rates must remain concessional," he said.

When a correspondent asked him how he proposed to bring about deficit reduction while increasing public sector spending on infrastructure without imposing fresh taxes, he remarked, "How do I do it? You (will) have to wait for my budget."

He faulted the previous government's policies for the current industrial slowdown in the country. "It had stopped public sector expenditure on infrastructure, believing that the private sector would take care of it which did not happen, resulting in the industrial slowdown," he stated.

The minister said the government would encourage investment by public sector, private sector, and other sources, including foreign investment, to build the infrastructure, currently a major hurdle to economic growth this approach would help pick up industrial growth as well, he added.

Sinha was among the invitees to the special 22-nation conference convened by Treasury Secretary Robert Rubin to discuss the East Asian crisis, especially the measures to contain its effect on other countries and regions.

The Group of 22, comprising finance ministers both from developed and developing countries, set up three working groups to explore proposals.

These groups were asked to examine ways to increase openness further -- for both member countries economic operations and the internal workings of the IMF. They also are to look at beefing up the weak banking supervision in developing countries and proposals to make wealthy banks and investors shoulder more responsibility for investment decisions that go bad.

In reply to a question, he said his current visit to the US had been "extremely satisfactory." The kind of interest he saw among investors for India was very heart warming, unprecedented, and augurs well for the future. "I had a very successful visit," he asserted.

Later, the Development Committee, in a communique, urged the Bank to assist countries in strengthening key institutions and structural policies and to augment its skills and capacities in related areas, including particularly the financial sector, corporate restructuring and governance, and poverty reduction and social sustainability.

Earlier, the IMF's Interim Committee urged the bank to strengthen its ability to address the social consequences of financial crisis and help governments avoid future crisis.

UNI