Instant cross-border payments vs. current account inconvertibility

Ajay Shah and Bhargavi Zaveri reflect on the recent India-Singapore deal to allow cross border payments via UPI and Paynow.

They say for the transactions to happen seamlessly, India needs to relook at current account convertibility:

Current account convertibility means that cross-border transactions, for the purpose of current account activity, are as frictionless as domestic transactions. Many people believe that India is fully current account convertible; it is sometimes claimed that India has achieved current account convertibility in 1993 and is now inching towards convertibility on the capital account. This is an inaccurate depiction of where India is. There are explicit prohibitions, restrictions or tarriff barriers. There are procedural barriers that drive up the cost of cross-border transactions. There are threats of ad hoc enforcement or disparity across payment instruments or payment service providers.

At first blush, UPI-PayNow connectivity is a sweet and logical idea, there is the possibility of obtaining a quantum leap in reducing transactions costs for cross-border payments. However, it requires the invisible infrastructure of current account convertibility, which is at present lacking in India. The project of building UPI-PayNow connectivity is a great opportunity to re-open these questions and remove all the frictions, whether on paper or in practice, described above. Our objective should be to make India-Singapore payments on the current account as frictionless as (say) payments between the UK and the US.

 

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