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Archive for April, 2015


http://www.business-standard.com/article/printer-friendly-version?article_id=115042001189_1

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This is evident that as an economy grows and become more complex , controls should diminish, remaining  only to ensure that market function efficiently. To remove the capital controls it is desirable that a country enjoys great macro-economic stability, healthy fiscal situation and low inflation rate. India is long way from this state of bliss.

Indians have insatiable appetite for gold, also India imports 77% of its energy requirement that introduce instability in India’s BOP(Balance of Payment). The biggest danger of removing capital controls in the absence of above condition is to create the risk of getting quickly in to high external indebtedness, particularly of short term variety. India’s current position on external debt is a bit worse than what it was in 2007. External debt to GDP ratio is at 23.2% up from 17.5 in 2007. This was at 28.7 % in 1991. Forex reserve to total external debt(ration of cover provided by forex) is at 70.2% while it was 115.6% in 2007. Short term debt to GDP ratio also up from 14% in 2007 to 27.8% which was at 146% during 1991 crisis situation . Thus it is clear that if external indebtedness particularly of short term type  increases is not good.

Another danger of removing control is that rising tide of foreign inflow may artificially boost the rupee value. Already India’s currency is overvalued which has hampered the growth of exports from India. It was capital controls which helped India and china from 1997-98 Asian financial crisis. What India needs is long term capital through FDI’s. Thus opening more sectors and increasing depth of FDI’s should be our focus not full capital convertibility unless we reach appropriate stage

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Rural Distress is growing (Due to falling market prices of agri produce, unseasonal rains, faulty MSP(Minimum Support Price) regime while inadequate supply of fertilisers add to this ). Ramesh Chand committe report on MSP shows some way out. Some of its recos as below:

a)committe suggested  “Deficiency Price Payment mechanism” for crops to which MSP is declared but purchases are not materialised. Because CACP recommends price policy of 24 crops but purchase of only six takes place and even this happens where government procurement system is good and person has surplus to sell . In such a situation govt can provide difference b/w market price and MSP to farmers in case market price is below MSP.This would not have negative impact on the market price and subsidy given to farmer in such a way would not attract any WTO sanction.

b) Need to change the current methodology for calculating cultivation cost as it has lacunae. It dose not involve full value of family labour, the rental value of land, the interest on capital, the depreciation of fixed assets, etc. So committee suggested that Head of a family engaged in farming should be valued at skilled-wage rates,the interest on working capital should be estimated for whole, not half, of the period of a crop season,the land rental values should be based on actual rates prevailing in the sample villages and Interest & depreciation on fixed capital be projected by raising them at the rate of inflation in construction material etc.

c) CACP be consulted in Export – Import decisions as they are generally taken in the interest of consumer rather than the farmers.

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Why India Need a  financial centre?

India has Natural advantage to host international financial centre such as – we have required skill in mathematics, risk taking abilities, computer programming , accounting etc.

Other competitors like china has financial centre like HonKong but India has none.

Financial centre would create many high  paying  jobs which will result in higher GDP and higher tax revenue.

Indian users of financial service would be better served if they have easy access to the a globally competitive financial system. as far as top 100 Indian companies concern they have better access to finance in international market but Other companies get raw deal in international market.

What is required for such an endeavor to realise ?

Market players will have confidence in an Indian curency future only when the SEBI and CBDT are widely trusted. Capital controls needs to be relaxed.Contract dispute will inevitably arise and for that world class courts and arbitration procedure will be required.Thus planning for finance SEZs needs to be integrally connected with larger project of reforming the RBI,SEBI and CBDT, so that firms operating out of financial SEZ can compete with London and singapore.

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