Don't rush into full capital-account convertibility (with Purba Mukerji)

Tarapore Committee-II on capital account convertibility is due to table its report on July 31, 2006. Tarapore Committee-I, also appointed at the urging of Mr P Chidambaram during his first tenure as the finance minister, had recommended full convertibility within three years, ending 1999-2000 with specific goal posts adopted. The Asian financial crisis sealed the fate of that recommendation but the FM has once again revived the issue. We offer five reasons why India should not rush into convertibility.


India should stay course on the reforms, including increasing the role of the private sector in the financial markets, without committing to a specific timetable for full rupee convertibility.

 
 
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Abstract: 
Tarapore Committee-II on capital account convertibility is due to table its report on July 31, 2006. Tarapore Committee-I, also appointed at the urging of Mr P Chidambaram during his first tenure as the finance minister, had recommended full convertibility within three years, ending 1999-2000 with specific goal posts adopted. The Asian financial crisis sealed the fate of that recommendation but the FM has once again revived the issue.

We offer five reasons why India should not rush into convertibility. First, as Prof Jagdish Bhagwati forcefully argued in his celebrated 1998 article: The Capital Myth: The Difference between Trade in Widgets and Dollars, persuasive empirical evidence on the benefits of full convertibility is lacking. Recent research by one of us (Mukerji) shows that for countries with well-developed financial markets and stable macroeconomic environment, convertibility offers small positive growth effects.