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Informist, Saturday, Mar. 1, 2025

--Panagariya: Per capita incomes must rise before capital acct convertibility 

--CONTEXT: Fin Commission head Panagariya speaks at finance ministry event

--Panagariya: Strongly against capital account convertibility at this stage 

--Panagariya: Centre, states' combined fiscal deficit crowding out pvt invest 
 

NEW DELHI – Arvind Panagariya, the chairman of the 16th Finance Commission, said he was strongly against India allowing capital allowing convertability at the current stage, and added the country's per capita income should rise to $8,000-$10,000 before considering such a step. Capital account convertability refers to allowing the unrestricted flow of capital for all purposes, and India's rupee is a partially convertible currency after the reforms in 1991. 

"I am conservative on (that) and I would rather go slow on that," Panagariya said while responding to a question on whether India's capital account should be convertible, at the 49th Civil Accounts Day on Saturday. "We have managed the exchange rate, and by and large that has served us well since 1991."

India's ability to intervene and protect its currency would disappear should capital account become convertible, and external shocks would be felt even more closely, Panagariya said. While global challenges remain, the economist said he remained optimistic on India's growth, with the ability to meet the threshold of $14,000 per capita income to become a high-income economy.

According to the International Monetary Fund's World Economic Outlook in October, India's per capita GDP was $2,940 at current prices. Speaking at the event, Panagariya said India's demographic dividend would allow it to quickly catch up in terms of per capita income with larger economies over the next decade. Both with the large size of the population and its youth, India's savings rate would increase as younger generations save and invest for the future, he said. 

However, the savings rate is being eaten away almost entirely by being invested to meet the central and state government's fiscal deficit in India. The high deficits are also one of the reasons why private investment is not picking up, as it is being crowded out by the public sector, Panagriya said. In 2024-25 (Apr-Mar), the Centre is targetting a fiscal deficit of 4.8% of GDP, while states' fiscal deficits since FY24 are supposed to be capped at 3% of gross state domestic product, with some exceptions. 

Panagariya declined to speak about the Finance Commission's deliberations when asked, but said the reciprocal tariffs being threatened by the US administration under President Donald Trump provided an opportunity for India to gain greater access to the world's largest economy as a market for its good. Bringing down tariffs could result in a win-win bargain for both economies, should India also be able to negotiate lower tariffs for sectors such as textiles. However, if the situation escalates into a trade war, with tariff hikes on both sides, then the outcome would be "unfortunate" for both sides, the economist said.  End

US$1 = INR 87.50

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Aaryan Khanna

Edited by Akul Nishant Akhoury

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