ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

C P ChandrasekharSubscribe to C P Chandrasekhar

Wages of Capital Account Liberalisation

The government and the Reserve Bank of India have taken a series of measures in recent weeks to attract a larger volume of foreign debt capital. These measures only increase the economy's dependence on capital infl ows and make it vulnerable to outfl ows, even as they do little to deal with the basic problems underlying the fall of the rupee.

Thirst for Foreign Capital

The decision to allow qualified foreign investors to invest in India's equity markets is a source of concern both for the kind of funds that will be attracted and what this says about the government's own state of mind. Unless there is some urgency about seeking out additional sources of capital inflow, it is difficult to explain why the government must open the doors to a source that is unlikely to deliver much foreign capital and would, if it does, increase rather than decrease speculation and volatility.

Debt as Bargain Counter

The agreement in the United States on raising the debt ceiling that was reached at the last minute need not have been a cliffhanger. The broad contours of a deal and whose interests it would serve were known for some time. However, it could be a pyrrhic victory for the powerful financial sector. The downgrade of US debt by one rating agency does not change anything.

Extending Private Banking

Following the reiteration in the Union Budget of the decision of the government and the central bank to issue new bank licences, the union cabinet has approved certain amendments to the Banking Regulation Act in order to enlarge the influence of private promoters. A year after the proposal was first made and months after the issue of a Reserve Bank of India discussion paper, the purpose of licensing new private banks remains unclear.

Manipulating Basel III

The global banking lobby has managed to block structural reform aimed at averting another financial crisis as in 2008. It first stalled radical reform measures to restrict the activities of banks and break down institutions that were too big to fail. The focus then shifted to Basel III proposals that would strengthen capital requirements. But the global banks have now managed to dilute even the Basel proposals so as to make the changes currently on the table insubstantial.

Global Imbalances and the Dollar's Future

The large current account deficit of the United States, the growing foreign holdings of US treasury bills and then the recent financial crisis that erupted in the US have led to a revival of the question of the worth of the dollar as a reserve currency. Those who say that it is time for the dollar to go, are not basing their argument on the greater strength of another currency to replace the dollar. Rather, the most popular alternative is the Special Drawing Right of the International Monetary Fund, which is more a unit of account than a currency and whose value is itself linked to that of a weighted basket of four major currencies. There are three implications of such an argument. First, even when the weakness of the US and the dollar is accepted, the case is not that the dollar should be completely displaced, since even in the basket that constitutes the SDR the dollar commands an influential role. Second, there is no other country or currency that is at present seen as being capable of taking the place of the US and the dollar at least in the near future. And, third, the search is not for a currency that can be used with confidence as a medium for international exchange, but for a derivative asset that investors can hold without fear of a substantial fall in its value when exchange rates fluctuate, because its value is defined in terms of and is stable relative to a basket of currencies.

The IMF on Capital Controls

Why has the International Monetary Fund argued, through a staff paper, that there could be circumstances where capital controls may be warranted. It could be that since the current surge in capital flows to developing countries is causing problems, the IMF possibly does not want to be seen as having made the mistake of opposing capital controls as a means to manage excessive inflows. It has still to forget the criticism it faced when its intervention in the east Asian crisis exacerbated the downturn. On the other hand, by boxing in the situation where such controls are warranted, it appears to be encouraging policymakers in emerging markets to avoid such controls and providing them with the ammunition to justify inaction.

Union Budget for 2010-11 and the UPA's Growth Strategy

The growth strategy underlying Budget 2010 intensifies a recent tendency wherein private consumption expenditure has increasingly substituted for public expenditure in order to induce growth. It also accepts a regressive bias in fiscal policy as part of the strategy. In the Union Budget, the government has restructured the tax system so as to curtail revenue expenditures, while maintaining past direct tax concessions and using a part of its revenues to provide new concessions that are expected to spur demand, sustain and increase corporate savings and encourage corporate investment, all with the intention of "facilitating" growth. The potentially "inequalising" fallout of such an approach is possibly seen as collateral damage in realising a high rate of market-driven (as opposed to state-driven) growth, which needs to be redressed separately - if at all it will be.

Sovereign Default in the Core?

Rising sovereign or sovereignguaranteed debt followed on occasion by sovereign default was until recently a problem faced by developing countries. Now the pattern has turned upside down. It is the metropolitan centres of capitalism which are running up large debts and are experiencing a rapid increase in the public debt-GDP ratio. Some of them may even end up defaulting on this debt.

How Sound Is Indian Banking?

The Committee on Financial Sector Assessment has found Indian banking to be in sound shape. However, while liberalisation and financial integration may not have resulted in excess exposure of Indian banks to the toxic assets that originated in the US and Europe, there is still cause for concern since the behaviour of domestic banks - with lending shifting in favour of more risky assets - has begun to resemble that of banks in the advanced countries.

Must Banks Be Publicly Owned?

Even as analysts and policymakers in the United States and Europe are debating whether nationalisation is the best option to deal with the crisis in the banking system, governments have already opted to hold a majority of ordinary shares in the expanded equity bases of leading banks. Objections aside, the scale of the crisis portends that the need to inject more capital into the system will only grow. In addition, deregulation and the transition in banking from a structure that was based on "buy-and-hold" to one that relied on an "originate-and-sell" strategy almost certainly points to the need for a publicly owned banking system to ensure the proper functioning of the private sector.

Beyond Basel for Banking Regulation

The financial crisis has made clear that the accumulation of risk and the occurrence of crises are almost inevitable in a self-regulated financial system governed by a framework of the Basel kind. One solution is to monitor investment banks and hedge funds and subject them to regulation while seeking an institutional solution that would protect the core of the financial structure, the banking system. The bail out implemented in the US and some of the west European countries has been forced to take a form that perhaps provides the basis for such a transformation. Governments have opted for state ownership and direct influence over decision-making. Will this be temporary or a new form of banking regulation?

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