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

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Great Indian Story of Convertibility

Determination of fuller capital account convertibility is not based on the contemporary thinking of economists. It is essentially led by policy-makers' preferences and judgments.

Why Capital Account Convertibility in India Is Premature

At this stage, full capital account liberalisation promises no large benefits while it increases the risk of things going badly wrong. Variations in the flow of short-term capital, like bank loans, give rise to pro-cyclicality of the capital account, which provides the main mechanism by which free capital flows create problems. For the next 10 years at least, many other liberalising reforms need to take priority over capital account liberalisation.

Case against Rushing into Full Capital Account Convertibility

A strong financial sector is required if a nation is to reap the potential gains from trade in assets. In the financial markets, the collapse of a few institutions could lead to a collapse of the entire system. The experience of emerging economies suggests that one should approach the issue of throwing open the capital account with extreme caution.

Capital Movements and Currency Board in Argentina

The early 1990s currency board experiment in Argentina tamed inflation, but it eventually had other disastrous consequences. The pursuit of orthodox policies meant that within a decade the economy was in a shambles. A recounting of the Argentinian tragedy.

Convertibility: Brazilian Experience

The proponents of free capital movement claim that one advantage is the supervision of economic policies by the financial market in the direction of "prudent" policies. The Brazilian case shows precisely the opposite: inflows have not been concerned about fiscal and exchange rate "irresponsibility" and have eagerly responded to arbitrage opportunities, until the "market mood" suddenly changes, resulting in a mix of herd behaviour and a speculative attack on the national currency.

A Practitioner`s Perspective

The majority of practitioners support the measured pace with which the capital account has been opened up in India and would, at best, counsel a moderate acceleration. However, they would argue for a rationalisation of the existing system of controls to remove the â??inefficienciesâ? within the system. The move to convertibility need not be a grand policy gesture, but a steady and focused approach.

Flawed Logic of Capital Account Liberalisation

This article presents a brief summary of theoretical analysis and empirical evidence, suggesting that it is unwise to embark on further capital account liberalisation. India may miraculously avoid the boom-bust cycles associated with open capital accounts, but the costs of failure are very high. And India has very little slack with which to gamble.

Currency Sovereignty and Policy Independence

There are benefits to currency sovereignty, defined as a floating exchange rate currency issued by a sovereign government. When Argentina abandoned its currency board, it gained policy independence: its exchange rate was no longer tied to the dollarâ??s performance.

Foreign Banks in Historical Perspective

This article views the operations of foreign banks in historical perspective, and taking a cue therefrom, provides an analysis of contemporary policy that has promoted their aggressive expansion. The paper begins with a brief overview of the genesis and development of foreign banks in India. This is followed by an account of their operations, relative to the concurrent growth of domestic banks, during the colonial period. It then moves on to an account of developments in the post-independence period, including legislation related to prudential regulation, demarcating the pre- and post-nationalisation phases, and the pre- and post-liberalisation phases. All along, the focus is on the changing dimensions of foreign banks relative to domestic banks.

Agricultural Credit in India

Agricultural credit has played a vital role in supporting farm production in India. Though the outreach and amount of agricultural credit have increased over the years, several weaknesses have crept in which have affected the viability and sustainability of these institutions. Following the shifts in consumption and dietary patterns from cereals to non-cereal products, a silent transformation is taking place in rural areas calling for diversification in agricultural production and value addition processes in order to protect employment and incomes of the rural population. In the changed scenario, strong and viable agricultural financial institutions are needed to cater to the requirements of finance for building the necessary institutional and marketing infrastructure. What is needed in agriculture now is a new mission mode akin to what was done in the 1970s with the green revolution. The difference now is that initiatives are needed in a disaggregated manner in many different segments of agriculture and agro-industry: horticulture, aquaculture, pisciculture, dairying, sericulture, poultry, vegetables, meat, food processing, other agro-processing and the like.

An Architectural Plan for a Microfinance Institutional Network

This paper proposes an architectural design for a microfinance service delivery network. It emphasises that savings followed by credit, insurance and money transfer, in descending order of priority, are the most important financial services needed by the poor. Microfinance may be classified as primary and secondary. Whereas the primary microfinance service includes savings, credit, insurance and money transfer, the secondary service includes enterprise credit, pension, equity transaction, leasing, etc. The paper then argues that competition with compassion and right to earn profit under the lens of a rational regulatory and supervisory framework and governmentâ??s active participation in capital formation, both human and physical, are the major forces necessary to fuel the healthy, sustainable and useful growth of microfinance institutions. The paper finally proposes a layout of the MF network, defining the roles of different entities, viz, government, central bank, microfinance authority, banking partner, rating agency, deposit insurance agency, promoter, capital provider, human capital building institution and, finally, MF clients.

Commercial Bank Lending to Small-Scale Industry

It is believed that the working capital support extended by commercial banks to small-scale industry is far from adequate. Although the SSI is a part of the priority sector, its share in total priority sector advances of all scheduled commercial banks has been falling consistently from around 39 per cent in 1992 to around 24 per cent in 2004. This paper examines the trends in sectoral allocation of bank credit to the SSI vis-Ã -vis the non-SSI sector in the post-reform period. The paper also makes an attempt to understand the variations in bank credit to the SSI sector across bank groups, and also the influence of the size and performance of banks on credit to the SSI sector. The results indicate that the high incidence of bad loans arising out of SSI advances could be one of the reasons for the declining share of SSI loans of the commercial banks.

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