The result is thus visible on the debate about India and capital controls. The control raj was ineffective. Capital is supple; it is relatively easy to repackage it from one form to another. If the policy says that debt is good and equity is bad, then capital will come through as debt. If policy says that equity is good and debt is bad, then capital will come through as equity. The private sector focuses on reality, on issues such as interest rate differentials, and then figures out how to achieve the objective while not violating the stated rules.

Small tinkering with capital controls damages India’s image, it introduces microeconomic distortions, and achieves nothing in terms of macroeconomics. Large tinkering with capital controls are not feasible given India’s current level of global trade and investment and leads to central bank governors and finance ministers losing their job. For this reason, the focus in Indian policy making should now be on getting the monetary policy framework right, to cope with fluctuations in capital flows. There is no point in yearning for the good old days before India had started off on reintegrating into the world economy.

The writer is senior fellow, National Institute of Public Finance and Policy