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P. Devarajan

If the Fed can regulate and supervise Citi and other banks, it is equally possible for RBI to do the same.

THE Reserve Bank of India is not comfortable with the quality of dollar inflows and would like to sniff at its source, if it is ever possible.

That places it strongly against the Centre whenever it relaxes FII and FDI norms for various sectors such as civil aviation and telecom.

Dollars from various shades of international investors will be flowing into these sectors and forex reserves will bulge.

The RBI thinks differently, though it may be useful to remind ourselves that the toughest exchange control laws put in place by RBI (till at least 1994) saw wealth being spirited away by politicians and corporates into Swiss banks.

With vastly easier laws in place, these funds are making their way back into the Indian economy and perhaps full convertibility may see not a low tide but a high tide of fund flows into the domestic sector.

Again stiff tax rates (up to 95 per cent tax levies) generated a vast pool of black money, with most ducking the taxmen while the tax laws were premised on the belief that it would go to help the poor.

The poor have only remained poor with the Government administered anti-poverty programmes enlarging the purses of officialdom and politicians.

An old man going by the name of C. Rajagopalachari warned the many-hued socialists of his time against the absurdity, but none cared.

Today free convertibility and low taxes may be a tough task while regulators for various sectors take over the job of controls from Government Ministries. Banks were nationalised to reach funds to the poor and that again has not happened. A Rs 10,000 crore write-off scheme only told every borrower that he need not pay back loans.

For the Government in New Delhi, the next steep hurdle is going to be banking and insurance.

Sensibly, the Centre is against placing more of tax monies to boost the capital of banks. With Basel II norms coming in by end-2006, is there any alternative to allowing FII and FDI funds flowing into the banking industry?

At the RBI, the fear is that easy access to the Indian banking system could leave space only for foreign and Government banks. Foreign players could acquire the smaller and better players in the private sector, leaving the weak alone.

Also, there is the view that in the West, governments impose equity caps on foreign stakes and India need not be any different.

That probably is the philosophy behind the current policy of allowing one of the three options: a foreign bank; a 100 per cent fully subsidiary or 74 per cent in a private bank. This rule is backed by the RBI proposal to limit any buying of a private bank into another at 5 per cent and 10 per cent, though it is indeed debatable whether the central bank is not exceeding its brief.

Monetary policy is the lone domain of RBI with the rest falling within the ambit of New Delhi. The Finance Minister, Mr P. Chidambaram, is rightly upset over RBI, although there is nothing official to suggest it.

Going by whispers on Mint Street, the Finance Ministry seems to have won the scramble over freeing voting rights in banks. However, one is not sure whether it extends to stakeholders in public sector banks.

As a trade-off, the Government may whittle the option of a foreign bank holding 74 per cent in a private bank, leaving foreign banks to hold 100 per cent subsidiaries with equal voting rights.

A fresh policy paper is in the offing and it will have to look into offering similar rights to an Indian corporate buying into a private bank. For the moment, this process has been stalled with the RBI proposing 5 per cent and 10 per cent equity limits in a private bank.

For some time this writer did go along with the idea of restraining Indian corporates and foreigners, but that is getting to be difficult.

If the Fed can regulate and supervise Citi and other banks, it is equally possible for RBI to do the same.

There is one lesson to be learnt from Indian banking: neither the Government nor the private sector has played fair with the customer. That is the bottom line.

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