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India has no plans to curb foreign capital flows: Pranab

Last updated on: October 8, 2010 15:44 IST

India has no plans to curb foreign capital flows: Pranab

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Aziz Haniffa in Washington DC

Finance Minister Pranab Mukherjee, in Washington, DC to attend the annual meetings of the World Bank and International Monetary Fund, said although some senior officials in the Reserve Bank of India have been advocating restrictions on foreign institutional investment into India on the grounds that it exacerbates a further imbalance and inflation, he does not believe such measures are necessary or appropriate.

During a question and answer session that followed his remarks on The Emerging Global Economic Architecture: India-US Partnership, at the Woodrow Wilson International Center for Scholar, Mukherjee said with regard to both foreign institutional investment and foreign direction investment, "I do not consider it is going to be so volatile at the present situation."

However, he acknowledged, "Definitely, it is the responsibility of the central bank of any country to watch this situation and as and when it is necessary to intervene appropriately."

He also reiterated that as he had stated in response to questions before he left India.

"I do not consider that situation has arisen in the Indian economy to date. The inflow of FII or FDI has not distorted the market sentiments and therefore there is no question of putting any curbs."

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Image: Finance Minister Pranab Mukherjee speaking at the Woodrow Wilson Center, Washington D.C.
Photographs: Courtesy, Embassy of India, Washington
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Mukherjee was also asked about the continuing high inflation rate in India and while agreeing that "there is an inflationary pressure in the system," he argued that one would "have to agree with me when you have massive financial expansions, we cannot expect to have non-inflationary impact in the economy at all."

"But I am more concerned about the inflationary pressure on food items," he said.

"We have taken steps to improve the supply side by providing either import of goods which are in short supply and on the demand side, the latest revision of the appropriate rates have created a situation where a part of the excess liquidity will be mopped up by the Reserve Bank of India."

The finance minister, however, said, "Here we are proceeding carefully because resorting to strict monetary policy and creating a liquidity crisis will affect the growth.

Therefore, we are accepting the policy through which we can strike a balance so that the growth is not retarded and at the same time inflationary pressure is being reduced."

He was optimistic that "it would be possible for us to do and we can end the financial year with an inflationary rate around 6 per cent."

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Image: Finance Minister Pranab Mukherjee greets IMF Managing Director Dominique Strauss-Kahn.

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When asked about the looming currency war around the world which had been predicted by the International Monetary Fund, Mukherjee said, "My approach is that we should try to engage the countries in negotiations and build up a consensus through which the matter could be resolved."

"It cannot be resolved through confrontation, but through consensus it would be possible and we should engage in the process of building up consensus," he added.

Last week, India's National Security Adviser Shivshankar Menon when asked if India shared the concerns about the value of China's currency, had said, "It's an issue that needs to be worked through." But there was no major debate on it in India as there is in the United States.

"As of now, what we see actually is a gradual appreciation of the Chinese currency against our currency, much more so than against the dollar," he said. "So, it's not an issue in India right now."

But Menon had acknowledged, "Obviously, it's an issue that concerns the world and there have been attempts to bring it up in international fora - in the Fund/Bank and in the G-20 as well."

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Image: India's National Security Adviser Shivshankar Menon.

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He had argued, "I don't think you'll find a common view on it yet. It depends on who you talk to-in India's economy as well. The importers will tell you it works for us-we get cheap goods-but the manufacturers will tell you it's not a good idea at all."

Thus, according to Menon, "I don't think we've quite struck the balance or come to the kinds of...it's not the kind o debate that you have here."

Mukherjee also addressed the issue of illicit financial flows from India to Switzerland and the Caribbean and where the Indian government stood in tracing these monies and in the negotiations with the Swiss in terms of the double tax avoidance agreement.

"We have avoidance of double taxation agreement with 78 countries," he said. "Also we have an exchange of information agreement with certain entities and regions-like Bahamas, Virgin Islands, etc."

Mukherjee said, "Up to now, we have written to each country with which we have avoidance of double taxation agreements to undergo an amendment to amend the relevant clause where the exchange of information between countries are enshrined."

"The process of dialogue is going on, and with Switzerland, we have been able to complete the negotiations-both sides have agreed-but we are awaiting the ratification of this agreement as per the Swiss laws."

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Image: Finance Minister Pranab Mukherjee greets World Bank chief Robert Zoellick.

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He said that once the ratification is done, "the date of operation will be announced," and that "as an when we get the information, it would be there for the taxation departments to raise the tax demands on them."

"But obviously," Mukherjee pointed out, "it would be prospective. I cannot be given a retrospective effect and we are at it."

The minister's appearance at the Wilson Center to deliver the first of a series as part of a partnership between the Wilson Center and the Federation of Indian Chambers of Commerce and Industry, capped a hectic day of meetings at the World Bank and the IMF where he met Bank president Robert Zoellick and IMF managing director Dominuque Strauss-Kahn, and also chaired a meeting of the G-24.

Once he finished at the Wilson Center, he immediately rushed to the State Department to meet with Secretary of State Hillary Clinton where the half-hour interaction was permeated by the pending visit of President Barack Obama to India next month.


Image: Finance Minister Pranab Mukherjee meets US Secretary of State Hillary Rodham Clinton.

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