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India must clamp penalties on short-term borrowing, says economist

India should pursue capital account convertibility as a distant goal while clamping penalties on short-term borrowings, a top US economist suggested today.

At the same time, "to encourage inflow of stable foreign investments, India should put in place transparent and simple measures for speedy approvals of long term investments, said Jeffrey Frankel, who was a member of the council of economic advisers to US President Bill Clinton till last week.

India should place price signals in the form of taxes on short-term capital movements to the country rather than quantitative restrictions, Frankel said.

Frankel was speaking on the 'East Asian Crisis: Causes, Policy Response and the IMF,' a talk organised by the Confederation of Indian Industry and the National Council of Applied Economic Research. He said transparency and simplicity in approvals of foreign direct investment would help retain investor confidence and thus foster stability in financial markets.

"While going after CAC, proper attention should be paid to the speed and sequence of the process," the Harvard economist said.

Without committing himself to the merits or demerits of either full CAC or capital controls, the economist said financial markets should be strengthened through better supervision of banks and financial institutions. For this, measures like capital adequacy ratio, deposit returns and action against relationship lending should be taken, he said.

Frankel said India can aspire to growth rates of eight to ten per cent, at least in the medium term. However, he said such high growth rates were not sustainable in the long term, as seen in the east Asian region.

Frankel said ensuring transparency in the markets would contribute to a great extent in avoiding a major financial crisis like in Mexico, east Asia or Brazil. He said sound quality information on macro-economic data and foreign exchange markets should be available to all even while ensuring strict accounting and disclosure norms.

Moreover, the economist said, a properly oiled crisis-resolution mechanism with well-planned bankruptcy laws and courts should be in place.

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