Did the Indian Capital Controls Work as a Tool of Macroeconomic Policy?

NIPFP Working Paper 87
[Link]

Ila Patnaik and Ajay Shah
April 2011

Abstract

In 2010 and 2011, there has been a fresh wave of interest in capital controls. India is one of the few large countries with a complex system of capital controls, and hence offers an opportunity to assess the extent to which these help achieve goals of macroeconomic and financial policy. We find that the capital controls were associated with poor governance, were unable to sustain the erstwhile exchange rate regime, and did not support financial stability. India's experience is thus inconsistent with the revisionist view of capital controls. Macroeconomic policy in India has moved away from the erstwhile strategies, towards greater exchange rate flexibility combined with capital account liberalisation.

India's Financial Globalisation

NIPFP Working Paper 79
[PDF]

Ajay Shah and Ila Patnaik
January 2011

Abstract

India embarked on reintegration with the world economy in the early 1990s. At first, a certain limited opening took place emphasising equity flows by certain kinds of foreign investors. This opening has had myriad interesting implications in terms of both microeconomics and macroeconomics. A dynamic process of change in the economy and in economic policy then came about, with a co-evolution between the system of capital controls, macroeconomic policy, and the internationalisation of firms including the emergence of Indian multi-nationals. Through this process, de facto openness has risen sharply. De facto openness has implied a loss of monetary policy autonomy when exchange rate pegging was attempted. The exchange rate regime has evolved towards greater flexibility.

Why India Choked When Lehman Broke

NIPFP Working Paper 63
[PDF]

Ila Patnaik and Ajay Shah
January 2010

Abstract

India has an elaborate system of capital controls which impede capital mobility and particularly short-term debt. Yet, when the global money market fell into turmoil after the bankruptcy of Lehman Brothers on 13/14 September 2008, the Indian money market immediately experienced considerable stress, and the operating procedures of monetary policy broke down. We suggest that Indian multinationals were using the global money market and were short of dollars on 15 September. They borrowed in India and took capital out of the country. We make three predictions that follow from this hypothesis, and find that the evidence matches these predictions. This suggests an important role for Indian multinationals in India's evolution towards de facto convertibility.