NEW DELHI :The European Union has suggested that India liberalize its capital account restrictions as part of a comprehensive free trade agreement being discussed with New Delhi, according to the text of the latest negotiations.
NEW DELHI :The European Union has suggested that India liberalize its capital account restrictions as part of a comprehensive free trade agreement being discussed with New Delhi, according to the text of the latest negotiations.
During the third round of India-EU FTA talks held between 28 November and 9 December, the EU proposed a chapter on capital movements, payments and transfers; however, the Indian side sought views on its purpose and scope, given that this would exceed India’s World Trade Organization commitments. In the proposed three-page chapter, the EU sought free movement of capital regarding transactions on the capital and financial accounts, which would liberalize and promote trade and investment between the two sides.
During the third round of India-EU FTA talks held between 28 November and 9 December, the EU proposed a chapter on capital movements, payments and transfers; however, the Indian side sought views on its purpose and scope, given that this would exceed India’s World Trade Organization commitments. In the proposed three-page chapter, the EU sought free movement of capital regarding transactions on the capital and financial accounts, which would liberalize and promote trade and investment between the two sides.
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“The EU also presented a new draft text, which had been tabled ahead of the round, on capital movements, payments and transfers and temporary safeguard measures…and explained its text proposal. The Indian side asked questions about various provisions of the EU’s text proposal, notably on the purpose and scope of the chapter,” an EU report on the negotiations said.
“Without prejudice to other provisions of this agreement, each party shall allow, in freely convertible currency…any payments and transfers with respect to transactions on the current account of the balance of payments that fall within the scope of this agreement…Each party shall allow, with regard to transactions on the capital and financial account of the balance of payments, the free movement of capital for the purpose of liberalisation of investment and other transactions…” the report said.
In June 2022, India and the 27-nation bloc resumed talks for a comprehensive deal covering a FTA, investment protection agreement, and an agreement on geographical indications. It is aimed to be concluded by December 2023.
In a response to a query by Mint, an EU official said, “The EU’s text proposal on capital movements, payments and transfer and temporary safeguard measures is a standard chapter in EU agreements. It contains principles and rules found in the Articles of the Agreement of the IMF, GATS and GATT. The purpose of the chapter is to ensure that the different commitments taken in the Agreement…will not be nullified in the absence of specific commitments by the Parties to allow such payments and transfers.”
Anuradha R.V., a partner at Clarus Law Associates pointed out that this was a “WTO-plus” demand from the EU side. “The WTO does not require free convertibility of currency,” she said. From a legal perspective, India can only agree to limited commitments on international transfers and payments, subject to its domestic laws, and subject to its rights and obligations under the International Monetary Fund, she said.
“On whether we should even consider this…my view is that it cannot be part of the FTA negotiations because the decision on capital account convertibility has to be a sovereign choice based on our internal assessment. It cannot be a subject matter of a free trade agreement…I am surprised at the EU asking for this in the FTA. The fact is, we have achieved progressive liberalization; and today, we are a fairly liberalized market as far as FDI is concerned and restrictions exist only with regard to specific sectors. Anything further has to be an internal regulatory process; and not a reaction to a FTA,” said Anuradha. She added that capital account convertibility also comes with risks, as evidenced in the various banking and currency crises.
Free currency account convertibility essentially means that there won’t be any restriction on the amount of rupees one can convert into foreign currency to enable an Indian to buy any foreign asset, and there also won’t be any curbs on foreign players from bringing any amount of foreign currency to acquire an asset in India.
“I feel that not only are we not ready for full convertibility but also allowing selective convertibility could make it challenging for India to prohibit misuse by non-EU persons. In any case, India permits partial convertibility even today through the LRS route and the free movement of foreign currency for outbound and inbound investments under FEMA regulations will minimal conditions for most sectors,” said Rajesh H. Gandhi, partner, Deloitte.
The next round of India-EU talks are scheduled in Brussels between 13 and 17 March.
Ajay Srivastava, co-founder of think tank Global Trade Research Initiative said India should not accept the EU proposal. “First reason being that the domestic financial sector needs an overhaul. The Tarapore committee report on the issue in May 1997 identified few pre-conditions for allowing capital account convertibility and we are nowhere near meeting those conditions,” said Srivastava.
“Sticking to the recommendations saved us during the financial meltdown in 2008-09. Besides, currently, with a fiscal deficit at 5.9% of GDP, inflation above 5%, we are nowhere near meeting the above conditions… and the Adani episode has demonstrated that our financial system including Sebi and banks need a thorough rehaul,” said Srivastava.
Nikita Singla, associate director, Bureau of Research on Industry and Economic Fundamentals (BRIEF) said that while capital account liberalization can mean more integration with the global economy, attempts need to be made at the same time to insulate from global shocks, given that the world is looking at a recession and the Indian rupee is near its all-time low. “So, when India negotiates this chapter, it would have to negotiate a few terms to it. It’s not that capital market liberalization is bad, but the conditions have to be conducive enough for it to work. What might help is to have these additional protective layers in the form of selective capital controls, as done by Chile in the past to induce a shift from shorter to longer-term inflows, by imposing an implicit tax on capital inflows reversed in less than a year,” said Singla.
