Increasing integration of India in global economy is one of very few policy level certainties going forward. So, there is a need to understand why we need that, risks we are willing to take and concessions we can make, or not.
Discussions on opening up economy are largely premised upon scarcity of domestic capital. Growth needs capital and as domestic capital is not adequate, we need foreign capital. I think its time, we test the assumption that capital continues to be scarce in India. Is Indian growth still constrained by lack of domestic capital and if yes, to what extent? For the sake of argument, if we take Net International Investment Position (NIIP) to be proxy for how much net foreign capital we are consuming, we get interesting result. Over last 7 years, India has grown at 5% CAGR at constant prices, whereas NIIP is unchanged (ignoring year on year variations).
And indeed, if domestic capital is inadequate, we need to bring in domestic players to intermediate flow of foreign capital, especially the debt part of it. We need to provide regulated entities flexibility on products and markets when it comes to resources raising. This will help development of Indian issuers of capital, lower their cost, widen the resources base and ensure a more level playing field for them vis a vis foreign intermediaries.
A related issue is ownership of sovereign debt of a country. If sovereign yield curve is a utility, it is critical to ensure that decision making for this utility is domestic. An open capital account will not prioritize that. So, can we introduce entry & exit barriers or some other measures that structurally supports domestic players? I don’t think that is possible. But what we can certainly do is maintain/ensure a level playing field for domestic investors so far as tax, accounting, regulatory and other operational requirements are concerned.
To sum it up, while I am not sure if we need foreign capital or not, I do know that in case we feel the need to pursue foreign capital, policy measures, by design, should be fair to domestic investors.
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