Cross Border Capital Account Transactions: Factors Influencing Policy Reforms in India

Abstract

Indian economy has undergone a paradigm shift from agricultural predominance to service sector over the last six decades. Growth of services and manufacturing sector placed India among the fast emerging markets and attractive investment destination for global investors. For the first fifty years after independence, foreign exchange was a scarce and, thus, a controlled resource. With gradual opening of economy in the early nineties, and Foreign Exchange Management Act, 1999 (FEMA) superseding the Foreign Exchange Regulation Act, 1973, there was a noticeable shift from a controlled regime to relatively liberalized environment. Initially current account transactions were opened up to give fillip to trade, and industry sector specific relaxation was pronounced on capital account allowing Foreign Direct Investment by way of automatic or approval route.

Indian Government has been proactive in gradually liberalizing capital account transactions since FEMA was enacted on inbound investments, overseas investment and External Commercial Borrowings. In the pursuit of development, it may be necessary to decontrol capital account transactions to achieve full convertibility of Indian Rupee; however, after nearly two decades of liberalisation, there are still challenges to open up many industry sectors on capital account.

This study is undertaken to identify factors that influence policy reforms with regard to cross border capital account transactions and provide recommendations to policy makers and industry. Research gaps derived after extensive literature review has led to relevant research questions and hypotheses for testing. The nature of study required detailed and interactive inputs from industry and policy makers to get the perspective and understanding on the subject matter. Qualitative methodology is used for the purpose of research with use of primary data collected from industry and policy makers, and existing secondary data for additional analysis. In-depth interviews of twenty six senior management level respondents were conducted with open-ended questions to capture primary data to gather industry and policy makers’ views on cross border reforms and thematic inputs on inbound investments, outbound investments, external commercial borrowings, and full convertibility. For wider and deeper understanding, six different industries are identified for selection of respondent with further emphasis on pharmaceutical and chemical industry. Secondary data in terms of India macroeconomic trends and global scenario are analysed to support or validate the findings. For a comprehensive study, detailed data analysis is carried out by dissecting primary data into industry sectors, policy makers, and thematic analysis, India macroeconomic trends, and global scenario.

The key findings from primary and secondary data analysis, its triangulation and hypotheses testing has led to logical and relevant conclusions to address the research objectives and answer the research questions. The outcome for the study has helped in recommendations for policy makers for framing the reforms, and for the industry on policy implications. Key recommendations for policy makers is that it is not advisable to implement full capital account convertibility in absence of clear guidelines on processes, long term policy commitment, all round development including support of MSMEs and most importantly, unless desired levels of key macroeconomic parameters are achieved. With Indian economy moving towards further liberalisation with potential of increased inbound investments, key recommendations for industry on policy implications include need for good corporate governance and manufacturing practices, transparent and ethical dealings and action based on well-defined medium to long term strategy.