Articles by Arvind Virmani

Using the literature of pollution control and extending the idea of a Tobin tax, this essay argues that as far as unwanted excessive leverage by financial institutions is concerned, a leverage tax could be thought of. As far as complex financial products are concerned, the solution perhaps lies in transparency and a process of simplification of the products. In handling misrepresentation/fraud, regulatory oversight of products or establishment of effective customer protection agencies could be thought of.

In the 21st century, all major countries recognise that international trade and financial flows are in the interests of both the source and destination countries. Therefore, there is a need to promote economic relations for mutual gain. This article documents the relative economic and geopolitical position of the major countries and outlines the new challenges facing the US, and, to a varying and perhaps lesser degree, the other major countries, including India. It also gives a projection of the world economy and polity over the first half of the 21st century which helps clarify the challenges and opportunities for the US and India, and the imperatives for mutually beneficial cooperation.

This note argues that India?s tariff rates be brought down to globally competitive levels and proposes a uniform structure of tariffs. The reduction of duties will be accompanied by a real depreciation of the rupee relative to the exchange rate in the base line scenario (of no tariff reductions). This will substantially offset the direct effect of tariff reduction on industrial goods. The easy availability of inputs at low tariff rates and the pressure to improve productivity should take care of the remaining gap. No significant industrial product line is likely to go out of business, though intra-industry trade will increase even more rapidly.

Contrary to the assumptions of election analysts, the high growth rate of the last two quarters of 2003-04 may not have affected Indian voting behaviour. Secondly, the steady and perceptible deterioration in governance over the past four decades is closely linked to the anti-incumbency vote.

The liberalisation of India's external sector during the past decade was extremely successful in meeting the BOP crisis of 1990 and putting the BOP on a sustainable path. These reforms improved the openness of the Indian economy vis-à-vis other emerging economies. Much, however, remains to be done. India's economy is still relatively closed compared to its 'peer competitors'. Further reduction of tariff protection and liberalisation of capital flows will enhance the efficiency of the economy and along with reform of domestic policies will stimulate investment and growth. The main lesson of the nineties is that liberalisation of the current and capital account increases the flexibility and resilience of the BOP. This applies to trade, invisibles, equity capital, MLT debt flows, and the exchange market. The author's analysis confirms that in India the exchange rate is a powerful instrument of adjustment in the current account deficit. It also confirms that equity outflows are very unlikely to be a major cause of BOP problems (unlike short-term debt). The impact of fiscal profligacy on the external account has become indirect and circuitous with the implementation of external sector reforms. It operates much more through the general expectations about economic (growth) prospects and the risk premium demanded by foreign (and domestic) investors and lenders. Thus its negative effects are likely to be focused on the domestic rather than the external account. In other words, the negative long-term effects of fiscal profligacy are more likely to be felt in future on the growth rate of the economy and the health of the domestic financial sector.