India 66th Independence back to 1991

imagesToday India wake up to the 66th anniversary of free India with reduced freedom. The Reserve Bank of India (RBI) on Wednesday reversed the long-term secular trend of easing capital controls by severely limiting the amount of money citizens can remit abroad, and businesses can invest in foreign ventures. Gold imports are being further squashed.This gives me the feeling of 1991.

RBI put a spoke in their collective wheel by indicating that Indian companies can invest only amounts equal to their current net worth abroad through the automatic route – as against four times their net worth currently. If this norm had been in place 10 years ago, the Tatas would have thought thrice about buying Corus or Jaguar Land Rover, the Birlas would have found it tough to buy Novelis and Bharti Airtel may not have bought Zain. All these deals would have had to pass through tedious government clearances. 

The Below New capital controls announced by RBI on Wednesday :

Keeping in view the current macroeconomic situation, the Reserve Bank of India has today announced the following measures:

(i) Reduced the limit for Overseas Direct Investment (ODI) under automatic route for all fresh ODI transactions, from 400% of the net worth of an Indian Party to 100% of its net worth. This reduced limit would also apply to remittances made under the ODI scheme by Indian Companies for setting up unincorporated entities outside India in the energy and natural resources sectors. This reduction in limit, however, would not apply to ODI by Navratna PSUs, ONGC Videsh Limited and Oil India in overseas unincorporated entities and incorporated entities, in the oil sector.

(ii) Reduced the limit for remittances made by Resident Individuals, under the Liberalised Remittance Scheme (LRS Scheme), from USD 200,000 to USD 75,000 per financial year. Resident Individuals have, however, now been allowed to set up Joint Venture (JV)/Wholly Owned Subsidiary (WOS) outside India under the ODI route within the revised LRS limit.

(iii) While current restrictions on the use of LRS for prohibited transactions, such as, margin trading and lottery would continue, use of LRS for acquisition of immovable property outside India directly or indirectly will, henceforth, not be allowed.

The present set of measures is aimed at moderating outflows. However, any genuine requirement beyond these limits will continue to be considered by RBI under the approval route.

Once every decade, we have to trot out Ila Patnaik and Ajay Shah worked on the paper Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?
with the remarks that, In 2010 and 2011, there has been a fresh wave of interest in capital controls. India is one of the few large countries with a complex system of capital controls, and hence offers an opportunity to assess the extent to which these help achieve goals of macroeconomic and financial policy. We find that the capital controls were associated with poor governance, were unable to sustain the erstwhile exchange rate regime, and did not support financial stability. India’s experience is thus inconsistent with the revisionist view of capital controls. Macroeconomic policy in India has moved away from the erstwhile strategies, towards greater exchange rate flexibility combined with capital account liberalisation.


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