Wednesday, July 18, 2007

Moving towards de facto convertibility

One of the most important phenomena which has been taking place in India in recent years is rapid integration into the world economy. In the case of merchandise trade, trade integration is commonly measured by summing exports and imports, and expressing these as percent of GDP. In similar fashion, I find it useful to focus on the sum of money coming in and going out, on the current account and capital account taken together, as a measure of globalisation. The data shows these gross flows have risen sharply:

 Year Trillion rupees Percent to GDP 1999-00 9.16 51.28 2006-07 41.18 110.01

For such a structural parameter, going from 51.28% in 1999-00 to 110.01% in 2006-07 is a substantial change. When 110% of GDP is moving across the boundary, capital controls become increasingly ineffective.