The Hindu Business Line : FREE THE RUPEE

On Saturday last in Mumbai the Prime Minister, Dr Manmohan Singh, called for the full convertibility of the rupee. To many it sounded like the resurrection of a forgotten objective, an echo of a policy articulated in 1997 ironically when Mr P. Chidambaram was Finance Minister. Of the `pre-conditions' set by the Tarapore Committee on Capital Account Convertibility the most critical have been in place for some time now emboldening the Finance Ministry to nudge the rupee towards greater freedom. Yet, the subject of full convertibility, which will mean, among others, freedom for Indians to invest in foreign assets without limits, lay cold, till the Prime Minister lifted it off the backburner.

Laudable as the public expression of that goal is, the wonder is that it took so long in coming because the milestone for the freer exchange of the rupee with other currencies has been within sight for a few years now. The Tarapore Committee's key preconditions have been met — the fiscal deficit is at 4 per cent not far from the recommended 3.5 per cent, and inflation hovers at 5 per cent, the outer limit set by the panel. Admittedly, the latter is not the result of a Parliament-mandated target that the central bank has fulfilled. But a prudent mix of monetary policy and strong economic growth has curbed inflation more effectively than any mandating. There has been no policy destabilisation despite changes in government. So why has it taken so long for full convertibility to happen considering the strong capital inflows and the even stronger confidence in the country's growth prospects?

Part of the reason lies in the Tarapore report's timing. Arguably the most comprehensive road map for currency convertibility prepared by any country, it was wrecked by the South-East Asian currency crisis that erupted soon after its release. Mistakenly, the virtues of those nostrums were taken as recipes for disaster particularly as India and China, both with relatively restricted currencies, escaped unscathed. Successive governments, however, have freed the currency to the point where foreigners are allowed to buy and sell Indian assets with reasonable ease while Indians can buy foreign assets with restrictions. The notion of full convertibility presumably means unrestricted access by Indians to foreign assets and this is where prejudice displaces reason in the form of the "risks" involved in a freely exchangeable rupee. The best evidence against that prejudice lies in the strong economic growth, the build up of forex reserves to over $140 billion brought about by the very policies that are allegedly risk-prone, and the global benchmarking spurred by foreign capital in Indian corporate and financial entities. Subjecting them to further competition by permitting Indians to invest in global entities freely would challenge them more to change for the better.