NEW DELHI : The European Union has suggested that India liberalize its capital account restrictions as part of a comprehensive free trade agreement being discussed with New Delhi, according to the text of the latest negotiations.

During the third round of India-EU FTA talks held between 28 November and 9 December, the EU proposed a chapter on capital movements, payments and transfers; however, the Indian side sought views on its purpose and scope, given that this would exceed India’s World Trade Organization commitments. In the proposed three-page chapter, the EU sought free movement of capital regarding transactions on the capital and financial accounts, which would liberalize and promote trade and investment between the two sides.

“The EU also presented a new draft text, which had been tabled ahead of the round, on capital movements, payments and transfers and temporary safeguard measures…and explained its text proposal. The Indian side asked questions about various provisions of the EU’s text proposal, notably on the purpose and scope of the chapter,” an EU report on the negotiations said.

“Without prejudice to other provisions of this agreement, each party shall allow, in freely convertible currency…any payments and transfers with respect to transactions on the current account of the balance of payments that fall within the scope of this agreement…Each party shall allow, with regard to transactions on the capital and financial account of the balance of payments, the free movement of capital for the purpose of liberalisation of investment and other transactions…” the report said.

In June 2022, India and the 27-nation bloc resumed talks for a comprehensive deal covering a FTA, investment protection agreement, and an agreement on geographical indications. It is aimed to be concluded by December 2023.

In a response to a query by Mint, an EU official said, “The EU’s text proposal on capital movements, payments and transfer and temporary safeguard measures is a standard chapter in EU agreements. It contains principles and rules found in the Articles of the Agreement of the IMF, GATS and GATT. The purpose of the chapter is to ensure that the different commitments taken in the Agreement…will not be nullified in the absence of specific commitments by the Parties to allow such payments and transfers.”

Anuradha R.V., a partner at Clarus Law Associates pointed out that this was a “WTO-plus” demand from the EU side. “The WTO does not require free convertibility of currency,” she said. From a legal perspective, India can only agree to limited commitments on international transfers and payments, subject to its domestic laws, and subject to its rights and obligations under the International Monetary Fund, she said.

“On whether we should even consider this…my view is that it cannot be part of the FTA negotiations because the decision on capital account convertibility has to be a sovereign choice based on our internal assessment. It cannot be a subject matter of a free trade agreement…I am surprised at the EU asking for this in the FTA. The fact is, we have achieved progressive liberalization; and today, we are a fairly liberalized market as far as FDI is concerned and restrictions exist only with regard to specific sectors. Anything further has to be an internal regulatory process; and not a reaction to a FTA,” said Anuradha. She added that capital account convertibility also comes with risks, as evidenced in the various banking and currency crises.

Source : livemint.com/ For More details