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NEW DELHI, Feb. 26

THE advocates of liberalisation of the capital account, whose numbers have been dwindling, have more reasons to feel dejected.

First it was the apex bank, which sent out signals that liberalisation of the capital account was a process and not a single event.

Closely following the Reserve Bank of India's (RBI's) stance on this, the Government has also plumped for a calibrated approach towards capital account liberalisation.

A cautious approach to freeing capital controls will greatly help the country grow in an environment of a viable balance of payments (BoP), reasonably stable exchange rate, a sustainable external debt profile and an external sector with a durable strength and vigour, the annual Economic Survey of the Government said on Tuesday.

The Government seems to have been guided by the experiences of several emerging market economies in the recent past. A committee headed by the former Deputy Governor of the RBI, Mr S.S. Tarapore, had laid out a roadmap for capital account convertibility in 1997.

It had specified the milestones that had to be achieved before relaxing capital controls. The three important signposts for this included a lower fiscal deficit, mandated inflation target and a strengthened financial system.

Although foreign exchange reserves have been swelling, prompting the chorus for relaxing controls, the Government reckons that it is necessary that the quantum of reserves in the long run remains in line with the growth of the economy and the size of risk adjusted capital flows. According to the Economic Survey, the key to a sustainable balance of payments will be exports.

Although the level of current account deficit has been low thanks mainly to a subdued demand for non-oil imports, it is expected to widen mainly due to poor export performance.

In spite of this, the Survey reckons that the current account deficit would remain within one per cent of the GDP.

In such a scenario, net capital flows would have to be higher to finance a wider current account deficit.

Efforts would have to be centred on increasing non-debt creating capital flows, especially foreign investment flows.

The Survey has also touched upon the need for policy improvements in the area of exports, POL, imports, tourism earnings, software service exports and foreign investment flows.

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