The flight is beginning to return

Much of the money that was salted away abroad is perhaps returning to India

N Chandra Mohan Delhi

Imagine a brave new world in which any one of us Indian residents can go to a foreign exchange dealer or bank and freely convert our rupees into dollars, pounds or euros to acquire assets abroad. Or acquire a diversified portfolio of internationally and domestically traded stocks to buy insurance against country-specific risks. Such a world can be imagined when the rupee is fully convertible, a regime that is still out of the question in India despite a steady build-up of forex reserves and healthy external profile.

The reasons are simple. Although the impressive macroeconomic performance of the Indian economy, with tigerish growth rates of 8 per cent during the last three years, is generating pressures for speedier liberalisation on the convertibility front, many economists and the Left have urged caution that such a regime will expose the economy to “unpredictable movements in capital flows” and create the “potential for fragility and crisis which is avoidable”. The big fear is of massive capital outflows with convertibility.

The example cited in this context is of Brazil whose external debt in the beginning of the 1980s was virtually identical to the flight of capital by its wealthy residents. In the Indian context, it is similarly feared that it will be not only the non-resident Indians (NRIs) who might head for the exits but also the domestic residents who will be free to take out any amount of their domestic wealth. As a result, the Indian economy might land up in a massive debt trap like Brazil and other Latin American countries.

Even the Reserve Bank of India (RBI) in its annual report urged caution in moving towards a regime of fuller convertibility or speedier financial liberalisation as the costs of instability are ultimately borne by “…the country, the government and the poorer sections. Avoiding crises is ultimately a national responsibility. The approach to managing the external sector, the choice of instruments and the timing and sequencing of policies are matters of informed judgement, given the imponderables.”

Such fears of massive outflows are not without substance as capital flight has indeed been the norm in India till recently perhaps. The International Monetary Fund (IMF), for instance, put out a report five years ago that $20-30 billion or $1 billion to $2 billion every year might have leaked out of the country during 1971-86. Evidence suggests that capital flight took place even during the era of reforms during the 1990s due to rampant misinvoicing or under-reporting of export and imports year after year.

The exact numbers involved, of course, are difficult to come by. This writer remembers a former revenue secretary telling him that the $1 to $2 billion estimate was on the low side as roughly 5 per cent of India’s export earnings are not repatriated back home and parked abroad. Thus if exports amounted to, say, $80.5 billion in 2004-05, around $4 billion would be the order of capital flight though understating or underinvoicing export receipts. To which one has to add overinvoicing of import transactions, if any. All of which suggests that capital outflows are possibly much higher than indicated by the IMF.