The Globalization Debate and India

This article argues that one of the key questions in the globalization debate in India is whether to allow unfettered movement of foreign capital or whether to make the rupee fully convertible on the capital account. The effects of financial flows can be considerable. Many innovations take place in the financial sector, but economists tend to overlook the downside risks of these innovations. Even though there is a broad consensus among economists on the benefits of trade liberalization, the jury is still out on the issue of free mobility of capital. On balance, the article comes out in favor of a gradual removal of restrictions on capital flows, evaluating the relative costs and benefits of capital account openness. With respect to trade liberalization, the article notes that free trade creates both winners and losers.