Budget 2021

Step up efforts to simplify cross-border activities

Our Bureau New Delhi | Updated on July 09, 2014

Revamp of FEMA framework suggested to loosen capital controls

The Economic Survey 2013-14 has pitched for an overhaul of the capital control regime to give a fillip to cross-border activities.

There is a need to drastically simplify cross-border activities as an element of reducing the cost of doing business in India, the latest Survey said.

Numerous emerging markets are doing better than India on this front (encouraging cross-border activities), it added.

Change FEMA

The Survey has suggested a regime where all capital account activities are permitted other than those in the explicit negative list.

This is in complete contrast to the current Foreign Exchange Management Act (FEMA), where all capital account activities are prohibited unless explicitly permitted.

Currently, cross-border activities are regulated according to capital controls based on FEMA, 1999. “The Survey is recommending loosening of capital controls. I see this as a right step and a medium to long-term objective. It’s very welcome. Currently, capital transactions in India are highly regulated,” Punit Shah, Co-Head of Tax, KPMG India, told BusinessLine.

Any relaxation of capital controls will only help the Indian economy in the long run in terms of more foreign direct investment (FDI) inflows, he said. Of course, there could be flight of capital from India. But India should be able to better manage the inflows and outflows, he added.

RBI responsibility

The Economic Survey has also suggested that all rule-making in FEMA should rest with a Government department.

This suggestion is being seen as controversial as the central bank may not relish giving up its responsibility on capital controls.

Over the last 15 years, thousands of pages of subordinate legislation have arisen surrounding capital controls, the Survey highlighted. This large mass of law is characterised by complexity, bureaucratic overhead, violation of the rule of law, and legal risk.

“The ground realities of this area are far removed from the good governance that India aspires for,” the Survey added. However, DK Srivastava, Chief Policy Advisor, EY, a professional services firm, told BusinessLine one needs to be cautious in terms of taking away responsibility from RBI.

Many economy watchers say India is still not ready for full capital account convertibility.

There could be, however, some scope for further liberalisation of capital controls.

Published on July 09, 2014

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