S Murlidharan

Time to up capital controls

S. MURLIDHARAN | Updated on June 05, 2013

A view of Bombay Stock Exchange… Impose Tobin Tax on FII flows. — Paul Noronha

Unrestricted external borrowings and overseas investment could put pressure on the rupee.

The recent permission accorded to the Indian insurance companies, both in the life and general businesses, to set up shops abroad, seems to be an initiative whose time has not come. Life and general insurance companies have been allowed to invest abroad, subject to the net worth criterion of Rs 500 crore and Rs 250 crore, respectively, in addition to the three-year profitability criterion.

When insurance spend in India stands pathetically at 4 per cent of GDP, efforts, in fact, must be made to break the resistance to the idea of insurance back home, rather than think in terms of capturing foreign markets which are fairly saturated. Outbound foreign investments presuppose Indian companies coming of age and developing unique capabilities, whereas the sad truth is private sector Indian insurance companies need the crutch of foreign collaborators to do business in India.

The move is of a piece with another initiative that has had no takers except one --- Indian Depository Receipts or IDR. IDR is an equity instrument meant for issuance to the Indian public by foreign companies in Indian rupees to be traded in Indian bourses. Except Standard Chartered Bank, no other foreign company has deemed it necessary to raise funds from India or humour the Indian public.

Indeed, it was a classic example of policymakers getting narcissistic and carried away. The unwarranted enthusiasm in this regard has made us a butt of ridicule, just as the permission accorded to blue chip Indian companies to make investments abroad, including the M&A route, left many with bruises, besides exerting pressure on the fragile Indian rupee.

Policymakers instead should have tried to provide a congenial atmosphere for domestic investments, lest Indian industrialists left India in a huff, enticed by the mirage of foreign destinations.


The Reserve Bank of India must forthwith tighten the ubiquitous automatic route, under which any Indian company can borrow money from abroad, subject to certain conditions, up to a staggering $700 million per year.

With a yawning interest rate differential between India and western countries, Indian companies have been plunging headlong into this automatic External Commercial Borrowings (ECB) mechanism, casting even elementary caution to the winds.

It is a tad curious that the RBI has not deemed it necessary to impose a modicum of control to rein in reckless foreign borrowing by, for example, prescribing a mandatory exchange rate cover. In its absence, many Indian companies have had the mortification of seeing the interest advantage overwhelmed by the heightened repayment liability disadvantage, what with the Indian rupee on a steady downhill course over the years.

Indeed, there should not be any automatic route except for blue chip companies, with the guidelines tightening the belt further by imposing mandatory exchange rate requirement, among others. For, the humungous loss on the eve of repayment as well as on the eve of payment of interest not only affects the companies concerned, but the entire economy. The liberal, ‘automatic’ regime assumes narcissistically that the Indian currency has come of age and that the Indian forex reserve position is robust enough.


We indulge Foreign Institutional Investors (FIIs) overmuch to our own detriment. We offer them reprieve from income-tax. The Indian government blinks at FII coming in and going back without let or hindrance.

There ought to be a Tobin tax that discourages the nonchalant use of the revolving door mechanism, taking a cue from Brazil and Thailand, among others.

The excessive indulgence shown to FIIs reinforces the view that bulk of the investments are of the round-tripping variety --- Indian black money stashed away abroad finding its way back to India. To be sure, the advent of FIIs has deepened and enlarged the Indian bourses, but that does not mean we should cosset them despite it being hot money. We preen that after all at least in one area we are ahead of China --- attracting FII --- without realising the fact that FDI or foreign direct investment is what matters more to the long-term fortunes of a country.


By far the best and the most fecund source of foreign exchange for the country have been remittances from the Indian Diaspora, though admittedly this is not on capital account. NRI remittances have changed the landscape of Kerala, which has been witnessing a construction boom giving rise to employment opportunities and other spin-offs.

Indeed, the steadily depreciating Indian rupee provides a strong urge to Indians abroad to remit dollars so that relatives back home can realise more and more rupees out of the same quantum of dollar remittances.

More to the point, there is no use just gloating over the fact that 20 per cent of doctors and engineers in the US are Indians. Decks must be cleared to facilitate their return so that they can contribute to nation- building efforts, like the Chinese Diaspora did.

In the absence of a conducive investment atmosphere, NRIs swallow their pride and choose to become US citizens in order to be able to work in strategic and secretive government departments there, like Pentagon and NASA, though their hearts may well be with India.

(The author is a Delhi-based chartered accountant.)

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Published on June 05, 2013
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This article is closed for comments.
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