Comment on Eswar Prasad’s “Some New Perspectives on India’s Approach to Capital Account Liberalization” John Williamson Senior Fellow, Peterson Institute

Stylized Facts FDI Inflows Accelerate Growth Portfolio Equity Inflows Accelerate Growth Total Capital Inflows are not associated with an acceleration of growth Total Capital Inflows = FDI + Portfolio Equity Inflow + Net Loans Conclusion: Loans are Bad for Growth

The Evidence of Prasad’s Paper The growth-promoting effects of FDI and portfolio equity are referenced, but not analyzed Noted that some new evidence actually suggests f 1 < 0, where g = f(K-inflow) Noted that “stocks of FDI and portfolio equity liabilities are…associated with better risk-sharing outcomes while stocks of external debt liabilities are not” (p. 6) TFP growth depends on K a/c openness the same way as growth, except that de jure K-account openness is positively correlated with TFP growth (not with total growth) Stocks of equity borrowings are positively, and debt liabilities negatively, correlated with TFP growth (p.7).

Explaining why Loans are Harmful Volatility (Table 4) means their outflow is the major source of the Crisis Danger Dutch disease created by big inflows when foreigners jump on bandwagons No positive spillover effects in technology, entrepreneurial enthusiasm, etc as with FDI and portfolio equity Valuation effects tend to be perverse (FX denomination increases debts during crises)

Threshold Conditions Prasad a believer (p.31) –Financial market development –Institutional development –Governance –Macro policies –Trade integration Indian stage of financial and institutional development suggests safety in accumulation of FDI and portfolio equity liabilities (p.23) India moving toward the threshold for debt accumulation but not there yet (p.23) So why the references to “excessive caution” (p.21, etc.) in moving toward CAC?

Position of India Prasad’s evaluation generally well-balanced Though the reason that India doesn’t face a threat from capital flight is precisely that it has NOT liberalized short-term debt flows (p.15) Argues that the inflow of loans is because the lack of a corporate bond market forces Indian corporates to raise loans abroad Obvious next step in liberalizing when the inflow becomes excessive is outward portfolio flows But cautionary moral from Chile!

Concluding Remarks Time to recognize that in India CAC = liberalization of debt flows and that this is unnecessary and undesirable for many years yet Prasad’s lingering love affair with CAC leads him to make wild unsubstantiated assertions, but his analysis and facts are consistent with the above conclusion Indian policy has been basically right.