If India can fast utilise currency flows for long-term projects, the regulatory regime could be more liberal, says Jaimini Bhagwati.
In the aftermath of the financial crisis of 2008, several orthodoxies - such as efficient markets, inflation targeting and central bank independence - are being reviewed.
Even the International Monetary Fund (IMF) and the World Bank have revised their views and conceded that capital controls may be necessary at times.
However, for the ideologically blinkered in India, capital account controls in any form are synonymous with "licence and permit raj".
Given the size of India's outstanding stock of internal public debt and projected budget deficits, there are limitations to which the government/public sector can access funds domestically.
This would suggest that India should welcome all forms of capital inflows to plug its funding gaps. However, if foreign capital flows into India are more than its current account deficit, the excess gets added to its forex (FX) reserves, which are warehoused in low interest rate bearing government securities of triple A developed countries.
The governor of the Reserve Bank of India (RBI) mentioned at a conference in Zurich on May 11, 2010 that "problems arise when the (capital) flows are largely in excess of the economy's absorptive capacity".
This article examines available options and corresponding logic to increase or restrict capital inflows against the irony of India having to lend its FX reserves to governments of countries with much higher per capita income.
First, a few numbers. As of December 31, 2009, India's FX reserves stood at $283.5 billion. On the same date, total external debt amounted to $251.4 billion, of which long-term debt with remaining maturities of more than a year added up to $206.2 billion.
Out of this long-term debt component, external commercial borrowings (ECBs) stood