Capital Controls: Who Should be in Control- Shaurya Doval

India has a love hate relationship with foreign capital. It is a complex arrangement. Unlike most countries where governments choose how to engage with foreigners, we have a maze of capital controls in the hands of financial regulators. Various financial sector laws and regulations treat foreign investors differently from Indian investors.

 

The most tumultuous of our love affairs is with NRIs. Today NRI money is bad, tomorrow it is good. Sometimes we talk about borrowing from NRI’s to push up the rupee, while at the same time we discuss regulations that try to disadvantage NRI money coming to India vis a vis domestic capital. A recent regulation proposed that if a fund manager is an Indian, we should not allow that money to come into the country. Fortunately, it was not implemented.

 

Money finds a way to come in and go out. If we don’t allow it through one route, it moves via another route. Lets say there are two kinds of people outside India, the Blue people and the Green people. Suppose India says that we will encourage capital inflows from Blue people. In this case, Blue people will take money from Green people and send this into India, for a fee. Such artificial distinctions merely create fees outside India and increase the friction of doing business in India.

 

Empirical evidence shows that countries impose controls on the cross-border flow of money for sale and purchase of assets for three legitimate grounds – One, largely open economies have concerns about terrorism or money laundering. They require that information be provided before money can be transferred across borders. International agreements require countries to pass laws that require it to prevent money flows from being used for such activities.

 

Second, capital controls are imposed for national security reasons. Almost all countries in the world have laws that prevent foreign ownership of critical infrastructure facilities where the government feels that the security of the country may be compromised. An example would be when the US government chose to prevent investment by a Chinese company in a port.

 

Third, when emerging economies witness pressure on their currencies, they may impose capital controls. These controls are of many kinds. They include price-based measures or quantitative restrictions. These decisions are usually made by governments. However, almost all emerging economies have slowly removed controls that permanently impede cross-border capital flows. The two exceptions are India and China. Countries such as Brazil have opened up their capital account, but have kept in place transparent price-based controls that can be imposed by the government.

 

The justification for capital controls by the Indian financial regulators is often to prevent `roundtripping'. The alleged round-tripping is a set of transactions where an Indian person takes money out of India, and then brings it back into India. The assumption is that tax has not been paid on the money that has been taken out of the country. As in other countries it is the job of the tax administration to enforce tax laws and collect taxes. Financial regulators should be concerned with consumer protection, preventing market manipulation or reducing firm failure. It is simply not their job.

 

We need to go back to legitimate reasons of imposing capital controls such as national security, terror financing and macro economic stability. That role should lie with the government and not with financial regulators.

 

About Author:

I am Shaurya Doval, a Garhwali, -an Uttarakhandi. Before all, I am a proud dedicated Indian committed to my motherland, her ethnicity, culture and Society.