The Hindu Business Line : Revisit with open mind

Convertibility has to be weighed on the scales of continued financial stability and solvency, and accrual of overriding benefits to the economy in comparison with the disabilities consequent on deferring it. Thus, the move should be thought of only if it enables the economy take a quantum leap and join the big league, says B. S. RAGHAVAN.

The Prime Minister, Dr Manmohan Singh, has put the Finance Ministry and the Reserve Bank of India on high gear with his call in Mumbai on March 19 to draw up a "road map" towards full capital account convertibility (CAC) "within a transparent framework... based on current realities" in the light of India's comfortable financial and economic position "internally and externally". The very next day (March 20), the Finance Minister, Mr P. Chidambaram, came out with a statement in New Delhi that the Government and the RBI would announce the concomitant steps "in a few days".

Even as he was making the statement, the RBI in Mumbai issued a press release that it was entrusting the task of setting out the framework for a fuller CAC to a Committee. Headed by the former Deputy Governor, Dr S. S. Tarapore (who was chairman of the first RBI Committee which gave a report in 1997 on the preparatory groundwork to be done), it comprises five other economists representing different shades of opinion and conviction.

CAUTIOUS ROUTE

There are some curious aspects of these developments: While the Finance Minister talked of "steps", the follow-up is in the form of just one step, and that too not of a definitive or substantive nature, but of the traditional kind of relegating the subject matter to a Committee which too — as per the press release — will start its work not right away but only from May 1 and has been given time till July 31 to submit its report. In other words, the RBI has effectively foreclosed the prospect of initiating any action on CAC for another four months.

Four days after the appointment of the Committee, on March 24, the Finance Minister stated his conclusion in Bangalore that the convertibility parameters were already "within striking distance" of the goals laid down by the first Tarapore Committee. Intriguingly, he also, in the same breath, made public the information about the simmering opposition of "some employees" of the RBI to the idea, because of their not being "familiar" with it.

Without any need to read between all these lines, it is clear that the RBI wants to take the cautious route of further stock-taking before opening up the country to full CAC. The RBI is a professional body and cannot be expected to fall in line merely on impressionistic grounds. If anything goes wrong, it will be held to blame for not correctly advising the Government. It is thus entirely within its rights to convince itself that the time is ripe for pulling all stops on this highly sensitive issue and act only after due deliberation rising above political considerations or ideological fervour.

All the more so because the RBI Governor, Dr Y. V. Reddy, himself, at least during his earlier years as the Deputy Governor, had not come through in his speeches and writings as a whole-hogger on this matter.

COMMENDABLE JOB

Any dispassionate analysis of the need for CAC has carefully to steer its course midway between IMF baiters, who hold CAC to be objectionable simply because the Bretton Woods tree had pushed for it, and free market votaries, who plump for it simply because they see it as the Ultima Thule of economic reforms. It should break the spell of South-East Asia meltdown which invariably darkens the discussion, just as even today, the ghost of the East India Company haunts India's liberalisation discourse.

CAC has to be weighed on the scales of enlightened national interest (to borrow the words of the Prime Minister), and on the paramount criteria of assurance of continued financial stability and solvency, and accrual of overriding benefits to the economy as a whole in comparison with the disabilities consequent on deferring it.

This means taking account of CAC's implications on monetary and exchange rate management, financial markets and financial system, and its impact on dollarisation of domestic assets and liabilities and the internationalisation of the Indian rupee. Such a study will not be meaningful without a comparative evaluation of the experiences of countries where it had been in operation.

Fortunately, the first Tarapore Committee had done a commendable job of formulating a plan for the phased relaxation of capital controls and the modalities of giving effect to it. Besides providing the yardsticks to be used to determine the adequacy of foreign exchange reserves to safeguard against volatility, it had made a series of recommendations on foreign investments by joint venture and wholly owned subsidiaries, and SEBI-listed Indian investors, borrowings from abroad by banks, integration of markets in foreign exchange, money and securities, foreign direct and portfolio investment and disinvestment, transactions by residents and non-residents and dealings in gold markets and gold products.

Some commentators, including (surprisingly) the former RBI Governor, Mr S. Venkitaramanan, have, in this context, questioned the appropriateness or relevance of the first Committee's emphasis on pre-requisites such as fiscal consolidation as gauged by specified percentages of fiscal deficit, inflation targeting, optimum CRR, deregulation of interest rates, and scaling down of gross non-performing assets (NPA) of banks.

The reasoning behind this is sound: Anything that conduces to stable and prudent financial management, evidenced by low fiscal deficits and more efficient management of banks aimed at reducing the NPA and streamlining the interest regime is bound to boost investor confidence within the country and abroad and help encourage and retain the inflows of capital.

However, there can be a legitimate question on the degree of criticality of their correlation with CAC. Therefore, those purported milestones should not be viewed in isolation but in conjunction with all the other factors.

HIGH STAKES

The years following the submission of the report in 1997 have seen the government traversing quite some distance along the lines recommended by the Committee.

It may not have proceeded in a systematic or sustained manner, but cumulatively its apparently ad hoc decisions have brought the country to the last few hundred feet of the summit, which is where, in mountain climbers' parlance, the utmost concentration and the most dexterous effort become vital to success.

This makes it imperative for the second Tarapore Committee to "revisit" the subject with an open and fresh mind, and not merely take off from the recommendations of its earlier report.

For, the stakes now have become immeasurably high, where even a single misstep may prove costly. The starting point is to have the idea firmly planted in the mind that India is not going in for full CAC for its own sake.

It is in a reasonably good shape as it is, and any further advances by way of taking the process to its logical end should be thought of only if it enables the economy to take a quantum leap and the country to join the big league in the immediate future.

A correct judgment can be formed about the usefulness of full CAC in fulfilling both these objectives only by asking the right questions and getting at the right answers.

As a prelude to posing the questions, we must make ourselves aware of their larger conceptual setting. For, there would be no need to ask them if the correlation between full CAC and accelerated growth rate is an indubitably established fact derived from detailed surveys of large enough sample of countries without any form of capital controls. Have such surveys been made? What are their findings? Watch this space!

(To be concluded)