The Hindu Business Line : `Current fiscal gap is too high for rupee float'

The roadmap for capital account convertibility of rupee should focus on the time frame for bringing fiscal deficit under limit, controlling inflation, ample foreign exchange reserves and a sound ratio of international trade — exports and imports — to the GDP, according to the Indo-American Chamber of Commerce (IACC).

IACC felt that fiscal deficit of both the Centre and States is ruling between 8 per cent and 9 per cent, which is more than the benchmark figure proposed by the Tarapore Committee in its earlier report for the capital account convertibility, according to the chamber.

Immediate steps have to be taken to bridge the resource gap. Focused attention has to be given to privatisation programmes that have been put on the back burner, it said.

Inflationary pressure

Managing the inflation too is important, according to the chamber. Inflationary pressures can create distortion like what had happened in the South-East Asian economies during the meltdown, it said. This had led to people converting their assets from local currency to dollars because of the steady erosion of the value of the local currency, it added.

The third important factor that has to be attended to is the ratio of international trade, that is exports and imports combined, to the GDP.

This ratio is improving in the Indian context, but one has to see whether is there any pent-up demand for imports, particularly for goods and services, which enjoy a measure of protection through higher customs duty, says the chamber.

That can be assessed only when the customs duty structure is brought at par at least with the ASEAN level, it said.

Forex reserves

A comfortable foreign exchange reserves is also important before switching over to capital account convertibility, the chamber says.

In anticipation of a likely surge in dollar withdrawals, particularly immediately after the announcement of the decision to switch over to the capital convertible regime, it is necessary to keep a safe buffer of foreign exchange reserves to fall back on, according to the chamber.