The recently released World Bank report on globalization of corporate finance in developing countries has triggered a lot of excitement in the the country by pointing out that India has attracted a major chunk of the record $40.1 billion capital that has flowed into the region. This, feel commentators, is proof that India, with its much-improved domestic policies, has increased its ability to raise capital from the global markets. However, they have overlooked another important transformation.

This is the fact that the very concept of capital flows is no longer viewed by Indian business and economic entities as a one-way movement — namely inflows — as was the case in the bad old days of socialist economic policy. Today, India is also experiencing massive outflows of capital as our companies go out to distant parts of the globe in search of investment ventures. The Indian multinational Tata Group’s $12-billion acquisition of Anglo-Dutch steel company Corus earlier this year resulted in FDI outflows from our country to the UK exceeding inflows.

Other major outward investments from India include Aban Loyd’s $445 million investment in the Norway energy sector and state-run ONGC’s $410 million investment in Brazil for an energy stake. The largest overseas player in 2006 was State Bank of India (SBI), with a foreign investment of $1.18 billion, followed by Dr Reddy’s Labs with $777 million.

These large flows of capital to and from the country have, however, brought the subject of capital account convertibility (CAC) to the centre of the economic policy discourse. There are two major questions doing the rounds — one, is full capital account convertibility (CAC) required to reap the full benefits of capital flows? Two, is our economy ready for such a step?

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