Wednesday, January 24, 2007

Easing capital controls on outbound FDI

In recent months, there has been a considerable focus on outbound FDI by Indian firms. Shyamala Gopinath, deputy governor of the RBI, has a speech documenting the evolution of policy on these questions.

I think there is more going on than is portrayed in this speech. The Tata Steel / Corus (would be) transaction is an example. It involves clever fund-raising in Singapore. The scale of resources involved greatly exceeds the flows across the Indian boundary as portrayed in Indian BOP data and as constricted by existing RBI rules.

When Indian firms become multinationals, capital controls bind less for them, for they will be able to transfer-price cash to a tax-efficient location where there is convertibility. Decisions from the headquarters about global FDI will then use the resources controlled at these foreign locations. The overall impact upon Indian de facto capital account openness, of "a gradual opening up" to outbound FDI is much larger than meets the eye.

This point falls within the larger theme of capital controls being porous and essentially un-enforceable in a world of modern trade, finance and MNCs.

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