The Hindu Business Line : Ease curbs on financial sector: Paulson

Mumbai, Oct 29 ‘Administrative restrictions’ on capital flows can have unintended consequences, cautioned the US Treasury Secretary, Mr Henry Paulson Jr.

India should liberalise such restrictions and broaden and deepen the domestic financial sector to mitigate the risks posed by greater capital flows, according to the Treasury Secretary.

Mr Paulson’s observations came just a few days after the Securities Exchange Board of India restricted FII investment through Participatory notes.

“India has taken administrative steps to adjust the pace of capital outflows and inflows. As experience in the region has shown, administrative restrictions of capital flows are blunt instruments and can have unintended consequences. They tend to inhibit efficiency and lose their effectiveness over time,” Mr Paulson said, addressing the US-India CEO Forum in Mumbai.

The Treasury Secretary opened his address by stressing on the importance of the Indo-US nuclear deal, and how beneficial the historic civilian nuclear agreement would be to both countries. “India is one of the world’s largest and most peaceful states with advanced nuclear technologies and has been isolated from the rest of the world on nuclear issues. This agreement will provide India access to the technology which can help it reach its economic and environmental objectives,” he said.

To be competitive

In the long term, he said India should take a number of steps to become more competitive, such as reducing the requirement that financial institutions hold large amounts of Government debt, reducing requirements for banks to provide credit to certain priority sectors and removing various restrictions and caps on foreign investment. “Limits on debt and equity financing and asset allocation restrictions on financial institutions, are impediments to putting resources to their most productive use.”

The Treasury Secretary said that the appreciating rupee had not hurt economic performance. He said, “India has allowed greater flexibility in the exchange rate in recent months and the appreciation in the rupee has helped to reduce inflationary expectations”

He added that “a strong dollar was in the nation’s (US) interest” and that the US looked at competitive values of currencies based on underlying economic fundamentals.

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