Re: Question: Full Convertibility of the Rupee

["Ram Narayanan" <loraln@worldnet.att.net>]

Utkarsh wrote:
>
>Q2. If an why shoul Indian government formulate a definite strategy to
make
>Rupee fully convertible in future

India  should proceed cautiously on this issue.  The absence of full
convertibility (on capital account) is one of the important reasons that
really saved India from a meltdown of the East Asian type.

Is capital account convertibility really necessary?

Two reputed economists, Jagdish Bhagwati of Colombia University and Dani
Rodrik of Harvard University have argued that international capital
mobility
brings more costs than benefits.

In a recent article,  entitled 'Capital Myth',  Bhagwati  concluded: "The
claims of enormous benefits from free capital mobility are not persuasive".
Rodrik's piece on 'Who needs capital-account convertibility', says: "We
have
no evidence that it will solve any of our problems, and some reason to
think
that it may make them worse". Both economists are deeply sceptical of the
idea that the IMF should prod countries to liberalize capital flows.

The two economists use two broad lines of argument:

1) the theoretical case for capital mobility is much weaker than the case
for free trade; and

2) there are few signs of the benefits of free capital flows but abundant
evidence of the costs.

Ram Narayanan
janaky@indiaintl.com or loraln@worldnet.att.net
http://www.indiaintl.com



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