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

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A Dangerous Measure

W e, the undersigned membersof the economics profession,are shocked by the governments eagerness to introducefull capital account convertibility. Thismove would imply that the inflow andoutflow of capital by residents andnon-residents would no longer besubject to any regulation. This would expose the Indian economy to extreme volatility, since inthe event of a capital outflow, it wouldno longer be only non-residentinvestors who would be able to repatriate their funds, but also Indian residents who would be free to take out any amount of domestic wealth.Such outflows by local residents areprecisely what had contributed to themassive build-up of Latin Americandebt in the 1970s and 1980s. In Brazil, for example, the total amount of theoutstanding external debt in thebeginning of the 1980s was almostequal to the estimated capital flight bythe resident rich. The costs of servicingthis debt and pursuing theconditionalities required to renegotiate the debt were borne by the workingpoor. Similar outcomes of capital accountliberalisation have been observed in a host of other developing countries,such as Turkey, Indonesia and Mexico.It should be noted that the Indian economy could insulate itself from thecontagion of the south-east Asianfinancial crisis in the late 1990s onlybecause the capital controls in place atthe time prevented destabilisingmovements of capital. We do not want the re-enactment in our country of a scenario in which thepoor, who are among the poorest in theworld, have to pay the price for theunrestricted freedom of the rich to shift their wealth out of the country whenever it suits them.

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