No capital controls for now

Wed, 30 Jun Pre-Open

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Short term capital inflows have always been a problem for Indian economy. But the fact remains that we cannot do without foreign funds. Not just to build the country's infrastructure but also to add volume to our capital markets. The Finance Ministry has been proposing to impose a tax on foreign portfolio inflows. Globally this is popularly known as Tobin Tax after the famous economist. This is what Brazil had imposed to regulate short term capital inflows into the economy. Such a tax may regulate volatility in currency movements. However, it can also lead to a sudden pullback of FII money causing stock market crash.

Indian markets have been fearing such impact of taxing capital inflows for some time. But most of it has now been put to rest. Atleast for the time being. At the G-20 Summit, the Indian Prime Minister has ruled out such tax being imposed in India for some time. According to him, foreign capital inflows have not become a problem for the Indian economy as of now. To put things in perspective, foreigners have been net buyers of equities to the tune of US$ 6.5 bn in 2010. Thus the PM's view that imposing a tax on the same before it assumes challenging proportions, makes sense. However, the fact remains that India continues to run the risk of inviting too much short term funds in the days ahead. Especially when risky money will find its way here with developed markets showing no signs of recovery.

The economics of fuel subsidies

The Indian PM has also cited his resolve to de-regulate fuel prices in India. Thus after petrol, even diesel prices will be market determined. Without doubt this will have an impact on the already sorry state of inflation control. But the decision to do away with fuel subsidy, wherever possible is certainly a welcome one.

The International Energy Agency (IEA) has put forth some alarming figures on India's oil consumption. In 2009 India spent approximately US$ 40 bn on subsidies to the oil sector. This amount was next only to the sums paid out by Saudi Arabia. Further, the consumption of petrol and diesel in the OECD countries dropped by 8% in FY09. India's rose by 15% and 9% respectively! This rate of increase is close to the highest rates seen in the past 15 years. Also, the OECD countries require 1.1 barrels of oil equivalent to produce US$ 1,000 worth of GDP. The non-OECD countries require 3.5 barrels to produce an equal value! India is a significant contributor to this non-OECD statistic. These alarming figures on wastage of precious fuel necessitate more rational pricing of the same.

Little needs to be said on the impact of subsidies on Indian oil marketing companies. The losses that they have borne all these years have rendered them inefficient. Despite availability of critical natural resources. ONGC and Oil India produce only around 28% of the hydrocarbons discovered. International oil companies, on the other hand, average a recovery rate of 40%. That too in fields of comparable geology. That's primarily because our oil PSUs allocate less than 1% of their turnover to R&D. They feature amongst the lowest R&D spenders in the industry. Thus the economics of fuel subsidies support more efficient pricing than social incentives.