Capital Flows and Capital Controls in India: Confronting the Challenges
This chapter examines India’s experience with capital account liberalization, and management of capital flows. Aware of the risks posed by capital flows, Indian policy makers have taken a cautious approach to capital account liberalization—with inflows liberalized before outflows, and within inflows, equity flows, especially direct investment, preferred over debt flows. This approach has protected the domestic economy from financial contagion and crisis, while the liberalization of FDI flows has been beneficial for economic growth. Yet, as India has gone down the path of liberalization, the volatility of capital flows has increased. India has responded to this volatility by deploying multiple policy tools—including foreign exchange intervention, prudential measures, and adjustment of capital controls. Going forward, Indian policy makers need to carefully calibrate the pace of further liberalization, especially of short-term debt flows.
KeywordsFDIForeign Direct Investment Capital Flow Capital Account FDIForeign Direct Investment Inflow Capital Control
- Ahmed, S., Curcuru, S., Warnock, F., & Zlate, A. (2015). The two components of international capital flows. mimeo, University of VirginiaGoogle Scholar
- Akinci, O., & Olmstead-Rumsey, J. (2015). How effective are macroprudential policies? An empirical investigation. mimeo, Federal Reserve BoardGoogle Scholar
- Ariyoshi, A., Habermeier, K., Laurens, B., Otker-Robe, I., Canales-Kriljenko, J., & Kirilenko, A. (2000). Capital controls: Country experiences with their use and liberalization. IMF Occasional Paper 190 (Washington DC: International Monetary Fund).Google Scholar
- Athreye, S., & Kapur, S. (1999). Private foreign investment in India. England: Mimeo, Birkbeck College, University of London.Google Scholar
- Baru, S. (1983). Self-Reliance to dependence in Indian economic development. Social Scientist, 11(11), 34–46.Google Scholar
- Calderon, C., & Kubota, M. (2012). Gross inflows gone wild: Gross capital inflows, credit booms and crises. World Bank Policy Research Working Paper 6270 (Washington DC: World Bank).Google Scholar
- Cooper, R. (1998). Should capital-account convertibility be a world objective? In Should the IMF Pursue Capital-Account Convertibility, Essays in International Finance No. 207 (New Jersey: Princeton University)Google Scholar
- De Gregorio, J. (2014). Capital flows and capital account management. In G. Akerlof, O. Blanchard, D. Romer & J. Stiglitz (Eds.), What have we learned? Macroeconomic policy after the crisis (pp. 271–288). Cambridge, MA: MIT Press.Google Scholar
- Dell’Ariccia, G., Di Giovanni, J., Faria, A., Kose, A., Mauro, P., Ostry, J., et al. (2008). Reaping the benefits of financial globalization. IMF Occasional Paper 264. Washington DC: IMF.Google Scholar
- Demirguc-Kunt, A., & Detragiache, E. (1998). Financial liberalization and financial fragility. IMF Working Paper 98/83. Washington DC: IMF.Google Scholar
- Forbes, K., Fratzscher, M., & Straub, R. (2015). Capital flow management measures: What are they good for? NBER Working Paper No. 20860. Cambridge, MA: NBER.Google Scholar
- Ghosh, A. (2014). Managing the risks associated with volatile capital flows. In M. Callaghan, C. Ghate, S. Pickford & F. Rathinam (Eds.), Global cooperation among G20 countries: Responding to the crisis and restoring growth. New Delhi: Springer.Google Scholar
- Ghosh, A., Ostry, J., & Qureshi, M. (2016). When do capital inflow surges end in tears? American Economic Review P&P, 106(5), 581–585.Google Scholar
- Government of India (2007). Report of the high powered expert committee on making Mumbai an international financial centre, Ministry of Finance, Government of India, New Delhi. http://finmin.nic.in/mifc/mifcreport.pdf.
- Government of India (2009). A hundred small steps: Report of the committee on financial sector reforms, Planning Commission, Government of India, New Delhi. http://planningcommission.nic.in/reports/genrep/rep_fr/cfsr_all.pdf.
- Grubel, H. (1968). Internationally diversified portfolios: Welfare gains and capital flows. American Economic Review, 58(5), 1299–1314. December.Google Scholar
- Hajkova, D., Nicoletti, G., Vartia, L., & Yoo, K. (2006). Taxation and business environment as drivers of foreign direct investment in OECD countries. OECD Economic Studies, 2, 7–38.Google Scholar
- IMF. (1962). Balance of payments yearbook (Vol. 13: 1956–1960). Washington DC: IMF.Google Scholar
- IMF. (1969). Balance of payments yearbook (Vol. 20: 1963–1967). Washington DC: IMF.Google Scholar
- IMF. (2012). The liberalization and management of capital flows: An institutional view. Washington DC: IMF. http://www.imf.org/external/np/pp/eng/2012/111412.pdf.
- IMF. (2014a). Annual report on exchange arrangement and exchange restrictions. Washington DC: IMF.Google Scholar
- IMF. (2014b). India—2014 Article IV Consultation. IMF Country Report No. 14/57. Washington DC: IMF.Google Scholar
- Jeanne, O., & Korinek, A. (2010). Managing credit booms and busts: A Pigouvian taxation approach. NBER Working Paper No. 16377. Cambridge, MA: NBER.Google Scholar
- Kumar, N. (1990). Multinational enterprises in India industrial distribution, characteristics, and performance. London: Routledge.Google Scholar
- Lindner, P., & Jung, S. (2014). Corporate vulnerabilities in India and banks’ loan performance. IMF Working Paper WP/14/232. Washington DC: International Monetary Fund.Google Scholar
- Magud, N., Reinhart, C., Rogoff, K. (2011). Capital controls: Myth and reality—a portfolio balance approach. NBER Working Paper No. 16805. Cambridge, MA: NBER.Google Scholar
- Mendoza, E., & Terrones, M. (2012). An anatomy of credit booms and their demise. NBER Working Paper No. 18379. Cambridge, MA: NBER.Google Scholar
- Obstfeld, M. (1995). Risk-taking, global diversification, and growth. American Economic Review, 84(5), 1310–1329. December.Google Scholar
- Ohanian, L., Restrepo-Echavarria, P., Wright, M. (2015). Bad investments and missed opportunities? Postwar capital flows to Asia and Latin America. Federal Reserve Bank of Chicago, WP 2015-08. Chicago: Federal Reserve Bank of Chicago.Google Scholar
- Ostry, J., Ghosh, A., Habermeier, K., Chamon, M., Qureshi, M., & Reinhardt, D. (2010). Capital inflows: The role of controls. IMF Staff Position Note SPN/10/04. Washington DC: IMFGoogle Scholar
- Ostry, J., Ghosh, A., Habermeier, K., Laeven, L., Chamon, M., Qureshi, M., et al. (2011). Managing capital flows: What tools to use? IMF Staff Discussion Note SDN/11/06. Washington DC: IMFGoogle Scholar
- Panagariya, A. (2008). India: The emerging giant. New York, NY: Oxford University Press.Google Scholar
- Patnaik, I., & Shah, A. (2007). India’s experience with capital flows: The elusive quest for a sustainable current account deficit. In S. Edwards (Ed.), NBER book Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences. University of Chicago Press.Google Scholar
- Reinhart, C., & Reinhart, V. (2009). Capital flow bonanzas: An encompassing view of the past and present. In NBER International Seminar on Macroeconomics 2008 (pp. 9–62). Cambridge, MA: National Bureau of Economic Research.Google Scholar
- Rey, H. (2013). Dilemma not trilemma: The global financial cycle and monetary policy independence. Paper presented at the Jackson Hole Symposium. http://www.kansascityfed.org/publicat/sympos/2013/2013Rey.pdf.
- Rodrik, D. (1998). Who needs capital-account convertibility? In Should the IMF Pursue Capital-Account Convertibility, Essays in International Finance No. 207. New Jersey: Princeton UniversityGoogle Scholar
- Sengupta, R., & Gupta, A. (2014). Policy trade-offs in an open economy and the role of g-20 in global macroeconomic policy coordination. In M. Callaghan, C. Ghate, S. Pickford & F. Rathinam (Eds.), Global cooperation among G20 countries: Responding to the crisis and restoring growth. New Delhi: Springer.Google Scholar
- Stockman, A., & A. Hernández, D. (1988). Exchange controls, capital controls, and international financial markets. American Economic Review, 78(3), 362–374.Google Scholar