"This is a cherished goal...the time has come for preparatory work towards capital account convertibility"

"The Prime Minister has made a very definite statement...the steps for capital account convertibility will be announced in the next few days"
P. Chidambaram, Union Finance Minister

There's not much to choose between the above two declarations of the Finance Minister. Except that one is a snatch from a 1997 Union Budget speech and the other from last month's newspaper front pages. When Chidambaram advocated capital account convertibility (CAC) in his 1997-98 'Dream' Budget speech, he clearly meant business. Days after the Finance Minister's proclamation, then Governor of Reserve Bank of India (RBI), C. Rangarajan, hurriedly picked one of his deputies, S.S. Tarapore, to prepare a roadmap for full convertibility.

Nine years down the line, it was the turn of the Prime Minister to make the call for CAC. Days after Manmohan Singh suggested that India's position, both internally and externally, had "become far more comfortable", RBI Governor Y.V. Reddy got into action by convincing Tarapore to come out of retirement to piece together another roadmap for a full-blown CAC by July. And, just as the gurus asked nine years ago, the question still looms large: Are we ready for CAC?

Clearly, the stage today is infinitely better set for CAC than it was in the latter half of the 90s. At that time, the gross fiscal deficit at the Centre stood at 5 per cent of the GDP (as against 4.1 per cent today). GDP itself was growing at a lackadaisical manner (5.0 per cent as against 8.1 per cent projected for 2005-06). Foreign exchange reserves were a meagre $26 billion (Rs 93,600 crore then), covering seven months' imports (these days they stand at $144 billion or Rs 6,48,000 crore, covering imports for 13 months). Banks were saddled with burgeoning double-digit non-performing assets (of close to 14 per cent), and their cash reserve ratio was at a high 9 per cent, as against 5 per cent today. Tarapore shot out a report laying the pre-conditions (see Are We Ready For CAC?) that suggested CAC over a three-year period by 1999-2000.

Disaster, however, struck much before. South East Asia was swamped by a currency crisis, and Tarapore's 80-page report disappeared into cold storage. Interestingly, as the former deputy governor goes about his task of penning down a second report, a few of his 1997 preconditions-on the gross fiscal deficit to GDP, inflation and cash reserve ratio (CRR) fronts, for instance-have still to be met (see "Are We Ready...?).

Those In Favour

Yet, in these gung-ho times, it's difficult to locate too many sceptics. "This is the final leg of liberalisation in India," says Ananda Bhoumik, Senior Director, Fitch Ratings India. "The tide (of foreign inflows) coming in post-CAC is likely to be higher than the tide going out," believes Mahesh Vyas, MD and CEO, Centre for Monitoring Indian Economy, dispelling any fears of flight of capital from the country's banking system. And Deepak Gupta, MD at consulting firm A.T. Kearney, points out that "CAC will bring a comfort factor for foreign investors". If these gentlemen are so obviously pro-CAC, it isn't without reason. For the first time in decades, the Indian economy has seen a robust growth of over 7 per cent for three consecutive years, with inflation under control in the 4.5-5.5 per cent range.

If there is a fear lurking around convertibility, it has to do with FII (foreign institutional investors) inflows. According to SEBI statistics, the FIIs brought in a little over $25 billion or Rs 1,15,000 crore into the country in the last three years. Experts warn that any sudden depreciation in the rupee-triggered perhaps by the rising trade and current account deficits-will trigger a massive outflow of foreign money, FII funds in the main. P.K.

Choudhary, MD of rating firm ICRA, says some amount of caution is required as a considerable amount of money is likely to flow in-and out-of the country post-CAC. "The banking system should be geared to handle this kind of volumes," suggests Choudhary.

Yet, the timing for CAC couldn't be better, with Choudhary himself pointing out that "India is poised for becoming a strong global economic super power". G.V. Nageswara Rao, CEO (Commercial Banking), IDBI Bank, says global competition will make Indian banks globally competitive. Such optimism and brave words notwithstanding, nobody's willing to stick his neck out and commit a timeframe for CAC. Perhaps the ghost of 1997 hasn't yet been exorcised.