After last week’s disappointing summit of the Group of 20 leading economies, a full- ?blown currency war may look unavoidable. But consider India. At a time when more and more nations are resorting to capital controls and currency intervention, India shows there is another way.
Since a change of heart nearly two years ago, India has stopped intervening in markets to manage its exchange rate. It has not followed countries from Brazil to Thailand by slapping on new capital controls. Unlike China and other east Asian mercantilists, it does not run an export surplus; nor does it insist on showering excess savings on rich countries that have no good use for them. Instead, India manages its economy as the textbooks say a developing country ought to. It runs a trade deficit, thereby contributing to the rich world’s recovery; and it imports capital to help lift its people out of poverty, registering growth of 8 per cent or so a year.
To many observers, including a lot of Indian ones, the country has succeeded because it has always kept capital controls, even if it has imposed no new ones recently – for example, its bond market remains largely closed to foreigners. Yet although India retains de jure restrictions on capital inflows, de facto global integration has progressed dramatically, as Ajay Shah of India’s National Institute of Public Finance and Policy has argued. Gross cross-border flows of money have jumped from around 50 per cent of India’s gross domestic product to more than 120 per cent over the past decade. Some 500 Indian multinationals have access to global capital markets and can funnel cash into and out of their home country. When you have globalisation of trade and investment, it is not in the power of government to suppress globalisation of capital.