PayPal, the company that pioneered payments and money transfers
on the internet, recently announced a change in the payment system
for Indian residents, by setting a limit of $500 per transaction.
Furthermore, users cannot use money credited to them to directly buy
goods or services—they will have to get the money paid into their bank
account first. PayPal said this change was made in order to comply with
Reserve Bank of India (RBI) regulations and, regrettably, did not give any
further details.
Many Indians use PayPal—shoppers who buy books or software
online, electronic retail entrepreneurs, and freelancers who are paid
online for ad hoc or small projects. Typically, they would receive and store
money at Paypal, and use it to pay for goods or services, or to make small
donations. With these new changes, they must withdraw any received
money immediately so the intermediation costs go up—users can still pay
others through PayPal with a credit card, but that means paying fees at
both ends of the transaction.
The limit of $500 per transaction hurts the bigger players who heavily
relied on PayPal as it is trusted by their US customers. Now they have to
tell customers to split transactions into chunks of $500—a process that is
tedious and appears unprofessional.
The new regulation was announced in a circular by RBI, which stated
that the Foreign Exchange Maintenance Act (FEMA) laws do not allow
for storing of export proceeds abroad. PayPal is therefore required to put
all such money into a pooled account at a “Category 1 I-Bank”, and then
transfer it to the exporter’s bank within seven days. The seven-day limit is
monetary policy
India’s currency policy is hurting its
economy
Photo: Jasleen Kaur
can finance more than three years’ worth of oil imports
(a far cry from just 15 days’ worth in 1992). Moreover,
India doesn’t need reserves against every single dollar
that India Inc. owes—very little of our government
borrowing is in dollars, and corporates can buy dollars
from the open market to pay back debt.
The rupee isn’t yet fully convertible. One thing
though—there is “current account” convertibility since
1994, so you can buy and sell goods abroad for “trade”
purposes. But you can’t buy assets abroad or transfer
dollars just as easily—that would be a “capital account”
transaction, which would cause you to jump through
several hoops. Indian nationals can buy certain assets
abroad, up to $200,000 per year. Foreign individuals
can’t own rupees at all, while foreign corporates and
institutions get near-unfettered access. Non-resident
Indians get a quasi-convertible regime with several
hurdles.
Why not just allow for full convertibility and get
rid of these restrictions?
Pros and cons of full convertibility
Full convertibility will restrict RBI control on the
rupee—but then, it won’t need to maintain reserves.
In panic situations, we won’t be able to protect our
currency quite as much—but we now know that is
a symptom, not the disease. Another concern is that
convertibility would cause too much volatility in
exchange rates. But the impact will be limited since we
already have large volumes being traded in both interbank
and exchange-traded futures markets.
The alternative—of locking down our dollars—
has an invisible and more damaging impact in terms
of lost opportunities. Simply put, we will grow a lot
more if the RBI and FEMA stopped being obsessed with
foreign exchange control.
More importantly, full convertibility would allow
our exporters to invoice trade partners in rupees. It
would allow us to trade with countries like Iran who
despise the dollar (Iran sells us a lot of oil for our
money). It will allow us to sell our country’s debt and
equity to foreign entities more easily—even individuals
will be able to buy our stocks and bonds. We will be
able to buy assets abroad, even if we needed to report
it, without needing permission.
Ajay Shah, professor at the National Institute
of Public Finance and Policy, goes one step further
and says that we must dilute reporting requirements
as well—you could create barriers from onerous
the RBI restriction, wherein interest needs to be paid
above that time (in addition, you have to be a bank);
PayPal is required to report in detail all transactions
over the $500 limit.
Storing virtual money owned by Indians—in a
holding system where you’re allowed to put money in
and take it out—is regulated by RBI under the Payment
and Settlement Systems Act, 2007. It specifically
requires that only banks can offer “open” systems
where you can deposit and withdraw funds—such as
credit and debit cards. Semi-closed instruments—
where you only buy a certain set of services—require
RBI approval, and can’t be converted to cash. These
are the restrictions that prevent the cashing in of gift
vouchers or converting credit card points to money.
Barter is okay, cash conversion is not.
It might seem like the best option is for PayPal to
become a bank. The question is, can PayPal become a
bank? Even if it wanted to, the RBI is unlikely to give
the company a license. Or, PayPal could register as a
“semi-closed” service, but that doesn’t allow them to
pay out money to end-users. The rules may appear to
be harsh, but they apply broadly to everyone in the
business—this is what stopped the Times Group from
offering a similar service earlier.
Having said all this, there is something we must
change.
Change the mindset, change the rules
FEMA—the act that dictates the $500 limits, restricts
storing money abroad—is unnecessary. It is an artefact
of the closed regulatory system that makes the Rupee
not fully convertible. After all, why should we care
if people hold their foreign currency abroad? If they
pay taxes on such income in India, it shouldn’t be a
problem.
The RBI or the government believes that India
needs the dollars—so you shouldn’t be allowed to
store it abroad, and must bring it home and convert it
to rupees. But we don’t need the dollars anymore—
with $300 billion in foreign exchange reserves, India
With $300 billion in reserves,
India doesn’t need dollars
anymore.
26 March 2011
reporting requirements while seeming to have full
convertibility.
Alongside all these measures, India must ease
restrictions on foreigners buying our rupee debt.
Apart from reducing interest rates, it will reduce the
amount banks, insurers and pension funds need to put
into government debt, and thereby help the fledgling
corporate bond market. We are a more fiscally
responsible country than most of the West, but we pay
three times their interest rates.
The PayPal issue cannot be sorted out for PayPal
alone—it has to comply with the rules of the land,
and if they want to pay out to Indian banks, they must
follow the RBI diktat. But the policy response should
be to open up our currency. We’ve been protected for
too long—and it seems—from ourselves. To quote
Tina Turner, we don’t need another hero; we don’t
need to know the way home.
for justice to get justice for their legitimate demand of
“one rank-one pension”. One rank-one pension is an
idea that must be implemented without further delay—
and without having to appoint any more committees of
bureaucrats to look into the issue. While a Department
of Ex-servicemen’s Welfare has been created in the
Ministry of Defence (MoD) in keeping with the UPA’s
Common Minimum Programme, there wasn’t a single
ex-Serviceman in it until recently. Such measures do
not generate confidence among serving soldiers and
retired veterans in the civilian leadership.
Finally—rather unbelievably—India does not
have a National War Memorial to date. Need we say
more?
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w does fiscal deficit impact inflation in
India?
JEEVAN KUMAR KHUNDRAKPAM and
SITIKANTHA PATTANAIK of RBI in a
paper (“Global Crisis, Fiscal Response and
Medium-term Risks to Inflation in India”)
explore the relationship between fiscal
deficit and inflation in India.
The authors frame their analysis against the
backdrop of the global financial crisis where
fiscal deficits (FD) have surged. They put
forth that the immediate impact of rise
in FD on inflation was limited as first it
replaced the declining private consumption
and investment. Second, there was no large
expansion in money growth as demand
for credit remained depressed. However,
going forward, FD has to be lowered as it
could lead to inflation, as both aggregate
and credit demand rise.
The authors study the relationship between
FD and inflation for the 1953-2009 period.
The finding is 1 percent rise in FD could
lead to a rise in 0.25 percent in inflation.
Though over a short-term, the relationship
is modest. The study also shows that FD
leads to rise in inflation and not the other
way round.
The paper concludes by saying that while
fiscal stimulus was appropriate in the
context of the global financial crisis, it may
have medium-term potential ramifications
for inflation situation. Hence, there is
a need to return to fiscal consolidation
path at the earliest. The key would be
to emphasise on the quality of fiscal
adjustment driven by expenditure rather
than revenue buoyancy.
Greece Crisis and Similarity to India
MICHAEL LEWIS in Vanity Fair (“Beware
of Greeks Bearing Bonds”) points to the
fallout of a monastery as the trigger of
the Greece crisis. Vatopaidi monastery,
a 1,000-year-old organisation was caught
in land scams with the Government. The
government had to step down amidst
public pressure; the new government
looked at the fiscal numbers and declared
that the deficit was much higher, leading
to a meltdown.
Lewis says that in the election year, the
tax collectors are pulled off the street!
There is a huge black economy in Greece
Amol Agrawal
Amol Agrawal blogs at Mostly Economics
(mostlyeconomics.blogspot.com)
with proceeds invested in real estate. To
avoid taxes, receipts/invoices are neither
given nor collected. It takes 10-15 years
for courts to give decisions leading to
few cases being filed. There are many
inefficient public sector enterprises, and
in some cases wage bills are much larger
than revenues earned. Its healthcare and
education systems are in very bad shape as
well.
While reading this, the parallels with India
cannot be missed—or ignored. India has
its own set of stories in public enterprises,
education and healthcare. India is a larger
economy than Greece, and hence much of
this is ignored. A larger economy works
both ways—it may delay the crisis, but the
fallout will be much larger. The hope is for
Indian policymakers to take some positive,
much needed lessons from Greece’s
governance crisis.
Mixing economics analysis with sports
TOBIAS MOSKOWITZ AND L. JON
WERTHEIM have written a book,
Scorecasting, where they mix economic
analysis with sports. Moskowitz shares his
findings with NYT Economix Blog.
There are two findings. One, they show
that for fans of Chicago Cubs, beer prices
matter more than the club’s win-loss
record. The stadium is the best place to
celebrate in Wrigley and people see it
more as an outing. Despite the club not
winning since the last 60 years or so, the
local attendance is as good as ever. This
is good for the stadium and earnings, but
works as a negative factor for the team as
there is no incentive to win.
The second finding is more controversial.
The authors say that the home advantage
is not because of knowledge of local
conditions, but because of umpires/
referees giving decisions that favour the
home team! In stadiums where umpires
knew that their decisions were being
monitored, the home bias did not intrude in
the decision. The authors think psychology
and behavioral science could explain the
reason why umpires sometimes give into
pressure from the home crowd.
The findings have interesting implications
for IPL/general Cricket. Though IPL
is relatively new, it will be interesting
to see whether fans in future will look
at the stadium than the team’s win-loss
record. The question of umpires favouring
home-teams is a oft-discussed issue in
cricket—with increase in technology,
this bias is mitigated, but the reviews are
limited. It will be interesting to know
about the history of umpires’ decisions as
well.
Four questions related to Japan’s
economy
Bank of Japan Governor MASAAKI
SHIRAKAWA gave a speech (“Toward a
Revitalization of Japan’s Economy”), in
which he dwelt on the four broad questions
he is asked in most meetings with press/
policymakers.
Why has Japan’s economy lost its vitality?
Reason is loss in productivity.
Japanese firms could not respond
to the changes in economic
environment after the 1990s.
Following that, consumption and
investment levels declined due to an
ageing population.
Why has deflation continued for a
prolonged period?
As growth continues to remain
positive, low price levels decline.
Lehman fall made the slump worse
for Japan, thereby prolonging
deflation. Yet, it is much lower
than deflation in 1930s and has not
resulted in a spiral.
Why are yields on JGBs have been stable
at low levels?
People believe Japan will continue to
grow and low inflation will remain.
However, one cannot take this for
granted, as fiscal imbalances can’t
run forever.
Can Japan’s economy regain its vitality?
Yes, it can—if the country can tackle
the problem of an ageing population,
raise productivity growth, create
markets where there is huge
demand like Asia, and improve fiscal
balances.
Shirakawa discusses the strengths of Japan
economy, which can help propel Japan’s
economy—its location in Asia, high level of
technological capabilities and soft power.
Economic history shows economies have
rebounded strongly from deep crisis in the
past like US and Korea—Japan could do so
as well.
Pareto
