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?

The Tarapore Committee (1997) defines CAC as “the freedom to convert local financial assets into foreign financial assets and vice-versa at market-determined rates of exchange”. This basically implies complete mobility of capital across countries. Says CII director of financial services G Srivastava: “We have to address the larger macroeconomic question of whether our economy is ready for full CAC. Conditions like fiscal discipline, controlled inflation and sustainable growth must be fulfilled. India is certainly not ready to introduce full CAC.”

Opines FICCI economic advisor Anjan Roy: “We are expecting $30 billion worth of FDI this year. Even if there is a slight slowdown in the growth rate of capital flows, it will not harm the economy. High capital inflows are anyway exerting upward pressure on the exchange rate.”