Capital Controls in India: Investigation Over their Effectiveness Before and After the Global Financial Crisis

Abstract

This paper examines on what extent India’s closed economy was affected by the global financial crisis and whether capital controls implemented by Indian policy makers throughout the years protected or deteriorated the country in the aftermath of the financial shock. I first construct a model of India’s GDP determinants, broadly in E. Kowalski East Asia economic growth framework and using a de jure index of restrictions to measure the impact of controls; secondly I build a series of models that correlate India, Cambodia, Indonesia, Malaysia, Philippines, Thailand and Vietnam’s GDP with de facto capital control measures (trade openness and foreign direct investment openness indicators) during 2008 financial crisis. The second model’s aim is to compare the single countries’ results, accordingly to their degree of openness, with the results obtained in the Indian model. Numerical results reveal a low significance both of de jure and de facto indicators respectively in the first and second models, not allowing to deduce the direction of benefits (or obstruction) that Indian history of state interventions, limits on the flows and last years steps towards financial integration brought in conjunction with the recent global slowdown.