A Tobin Tax is a tax on foreign currency transactions to discourage destabilising short-term inflows of international capital into a country
The Reserve Bank of India (RBI) governor D Subbarao has said that India is not contemplating imposing a Tobin Tax on capital inflows, but did not rule out introducing it later, reports PTI.
“Depending on what flows come in, we would employ measures, including if necessary something like a Tobin Tax,” Mr Subbarao said in response to a question after giving a speech at the Peterson Institute for International Economics, a Washington-based think-tank.
“At the moment, we are not contemplating one and I do not believe there is a need for one, but it is not off the table,” Mr Subbarao told the US think-tank.
Earlier in his prepared remarks, the RBI governor said: “The surge in capital flows into some emerging market economies (EMEs) even as the crisis is not yet fully behind us has seen the return of the familiar question—the advisability of imposing a Tobin-type tax on capital flows.
“Both before and after the crisis, there are examples of countries, notably Chile, Colombia, Brazil, and Malaysia that have experimented with a Tobin Tax or its variant.
“Even as there are some lessons to be drawn from the country experience, on the aggregate, it does not constitute a sufficient body of knowledge for drawing definitive conclusions,” he said.
Critics of the Tobin Tax—a tax on foreign currency transactions to discourage destabilising short-term international capital into a country—contend that the tax is ineffective, difficult to implement, easy to evade, and that its costs far exceed the potential benefits, and all this because financial markets always outsmart policymakers, he said.
Supporters of the tax argue that if designed and implemented well, the tax can be effective in smoothing flows and that evading controls is not such a straightforward option as efforts to evade require incurring additional costs to move funds in and out of a country, which is precisely what the tax aims to achieve, he observed.
“In India, given the overall thrust of policy, we are quite agnostic on the choice of different instruments. The stereotype view is that we have an express preference for quantity-based controls over price-based controls,” Mr Subbarao said.
“A critical examination of our policy will show that this view is mistaken. For example, on bonds we impose both a limit on the amount foreigners can invest as well as a withholding tax. Similarly, our policy on external commercial borrowing employs both price and quantity variables,” he said.
“We have not so far imposed a Tobin-type tax nor are we contemplating one. However, it needs reiterating that no policy instrument is clearly off the table and our choice of instruments will be determined by the context,” the RBI governor said.
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