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Further opening up Indian economy will be beneficial or detrimental.


While it is impossible for any economy to remain insular to outside world. The question�that arises is when and to what extent?�� China opened its economy in 1980s and then there was no turning for it which grew at a spectacular rate. Asian tigers i.e. Thailand, Malaysia, South Korea and Indonesia adopted the exports-led growth strategy and these butterfly economies also bloomed rapidly. India adopted this path in 1991 via its new economic policy (NEP) and we were too able to break the low growth cycle.

However the strategy soon got questioned after currency crisis in 1997, global financial meltdown of 2008 and the recent yuan�devaluation which has sent various economies plunging. As India is integrating more and more into globalized village with huge streams of foreign investment flowing into India and India repeatedly pressed by its potential trade partners like EU, US to waive off its import duties, India faces�the momentum decision to open its economy more.

The two major things that are repeatedly being demanded for is capital account convertibility (CAC) on financial side and�need to lower peak duties on trade front.

����������� First, coming to the need for CAC. While India has full current account convertibility, capital account convertibility is partial. At present, all inflows in foreign currency, irrespective of the nature, are completely convertible. However outflows arising out of conversion of rupees into foreign currency are restricted but even here rupee is �virtually convertible� as government can remove or re-impose restrictions on these kinds of transactions any time. For instance Exchange earners� foreign currency account. Thus, at present there are no apparent compulsions for the government to announce complete convertibility�and even China has broken the myth of inflows linked to convertibility and that openness is not possible without convertibility. Moreover when India is facing savings crunch at home, it would be inane to relax it now. However it is important to remember that over a period of time, it would be seen a test of maturity and our macro fundamentals and it would become inevitable.��������������

Moving over to second issue of peak�import duties, India is in discussions to sign FTA agreement with Europe. The major sticking point is EU demanding reduction of import duties on automobiles and wines while India is pushing for free movement of labor.

It is unhealthy for any negotiation when parties stick to their hardened stance and obstructs this give and take process. After India has got its model Bilateral investment treaty (BITS) prepared India can decide it on case-to-case basis that is to what extent it is beneficial for India to open its economy in light of what other party is ready to give in return. Thus without opening it for all countries, we can reap the benefits of openness before the entire globe becomes truly converted� into free trade area or Doha negotiations on free trade are concluded. Similarly, we can lend a�helping hand to LDCs in Africa and other parts of world by allowing them to sell their products on low duty basis.

Hence a cautious approach is the way to go for India in current volatile world and making it a phased process rather than averting or adopting

openness in one go. And here the question is not of should we open it but when should we�as it is an inevitable process. We should remember that there are no perfect international institutions that can decide the course of trade and investments. Though WTO is making commendable efforts in this direction, India remaining engaged with these institutions in a bid to make trade and investments completely multilateral should also try to protect its domestic economy from unhealthy outside influences like transpacific trade partnership, Trans-Atlantic trade agreement.

-Payal Mittal

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