Gradual opening up of India's capital accounts

 India's capital account has extensive list of control rivalling only China. Its not a character of any free market and free trade liberal economy to have such draconian capital controls. It has a toll on its firms as there is that much high cost of capital for denying them international access of capital. As a consequence this has a direct impact in India's economic growth as well. 

I recommend a gradual opening up of India's capital market focusing on below areas as a starting point:

 

-          There is currently only a subset of bonds that is issued under Fully Accessible Route (FAR) which is now included in JP Morgan’s emerging market bond index. We recommend the bonds across maturity classes to be included in FAR new issuance and make it eligible for foreign investment and which continues with no quantitative capping. This would deepen the portfolio of bonds which will attract more capital in Government bonds effectively reducing cost of borrowing. Currently India’s 10-year bond yield is around 7.27% while China’s is 2.66% and US’s 4.44%. More inflow of foreign funds in rupee denominated bonds would reduce the yield significantly and hence would keep the cost of borrowing for new issuances low. This effectively means that India can spend more on infrastructure, health, and education over long term without having to grow its fiscal deficit by same proportion10. Moreover, access to foreign capital for govt borrowing also means more domestic capital available for private investment (lower crowding out). Mostly when emerging economies controls capital inflow in short term bonds, it actually tries to have control the exchange rate as the short term capital is perceived to be hot money. However, the positive side is that it also improves accountability and transparency and brings international standards of reporting to India making it a more credible and stable economy.

-          Recently Govt of India cleared listed and unlisted Indian companies to list directly in overseas market . This requires companies to first list in GIFT International Financial Services Center (IFSC). The government is still deciding on the period of operation for any business to be listed abroad. We recommend that the state should not intervene in this for at least the companies which are already listed in the Indian Market. This helps Indian start up and corporates to access foreign capital which not just helps them with their investment and growth plans but also put them to scrutiny as mandated by international regulators.

-          A simple Tax Regime is needed to attract more capital into India. India currently applies withholding tax on capital gains of government bonds which is not an international norm. Moreover, India applies angel tax on foreign funds in private market which is differential of capital raised and fair value of securities sold. This kind of complex and unnecessary tax structure hinders startups to access global private equity and venture capital.

 References:

1   https://www.livemint.com/opinion/online-views/india-needs-an-open-capital-account-by-2025-11599303164180.html

2.       https://www.cnbctv18.com/business/companies/india-clears-the-deck-for-direct-listing-of-companies-in-the-overseas-market-18206041.htm

3.       https://www.spglobal.com/en/research-insights/featured/special-editorial/look-forward/unlocking-india-s-capital-markets-potential


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