India should adopt CAC as long-term goal, says Assocham

New Delhi, July 31 (UNI) India should adopt cautious approach towards Capital Account Convertibility (CAC) and rather pursue it as a long term goal, an industry chamber said today.

''CAC is while welcome goal, but India needs to tread on this path with care as the country faces a large number of challenges relating to CAC, which include macroeconomic scenario, capital mobility and foreign exchange reserves,'' Assocham President Anil K Agarwal said in a representation to the Finance Minister P Chidambaram.

The Chamber proposed a six-pronged strategy for government's consideration before it embarks on the path of CAC -- which include adequate attention for maintaining fiscal deficit under check and internationalisation of Fiscal Responsibility and Budget Management Act 2003 (FRBM).

''Stringent discipline in public expenditure is a sin qua non to ensure that capital inflows do not provide an easy way of perpetuating what is ultimately unsustainable,'' the Chamber Chief said.

Secondly, it felt, forex and interest markets should be gradually liberalised through more sophisticated hedging instruments and steps should also be in place to control money laundering.

Besides, social security net is needed, as increasing competition can mean greater and unexpected hardship.

The other strategies include that gross inequalities in the system, such as charging SMEs much higher rates than large corporates, need to be smoothened. It said a scientific credit appraisal system needs to be instituted.

The combined fiscal deficit of the Centre and states at around 7.7 per cent (Centre contributing 4.1 per cent and the rest, of the states) is still a cause of concern while the ratio of public debt to GDP has increased from under 65 per cent in 1997-98 to over 83 per cent in 2005-06.

It, however, noted that the poor state of infrastructure could be a stumbling block for higher GDP growth.

India needs investment of over 1.50 trillion dollars in the next five years to sustain 8 per cent growth. The government needs to create necessary environment and improve the current regulatory framework to attract investments in infrastructure.

India can also take a cue from the Chinese economic model to build a credible infrastructure that spurs manufacturing and employment intensive industries.

As regards international trade, though India is the fourth largest economy in the world in terms of purchasing power parity (PPP), its share in global trade is abysmally low at less than 1.5 per cent.

Government policy needs to be directed towards greater participation in global trade of goods and services.

Assocham is also of the view that capital controls can be useful in insulating the economy from volatile capital flows during transitional periods and in providing authorities time to pursue discretionary domestic policies to strengthen initial conditions.

India's progressive structural reforms have liberalised foreign investment in many sectors and markets, it said adding that the restrictions effectively exist on external commercial borrowings and that too mainly in the short end of the maturity spectrum; and on portfolio flows, which are limited to Foreign Institutional Investments (FIIs).

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