The Hindu Business Line : Regressive, says Dr Bhalla

In his dissent note, Dr Bhalla says, "The Committee refuses to recognise that there has been a major structural change in the Indian (and world) economy since 1997. This recognition implies that what was appropriate (fuller) in 1997 may be barely incremental today."

If the policies are implemented in the phased manner as the committee suggests, they might be inappropriate for Indian needs in the current scenario, he says.

The committee recommends that Indian residents be allowed to remit up to $ 1,00,000 per year by the end of 2008-09. However, the 1997 Committee's recommendation was that this limit should have been reached fully nine years earlier, i.e., by 1999 or 2000. What the Indian resident may be allowed to remit, and that too in 2008/09, is about 30 per cent less in real terms than what was permitted in 1999/00, says Dr Bhalla.

Citing another example, Dr Bhalla says that while stating that the exchange rate has been well managed in the last few years, the report also recommends that the RBI should be constrained to operate the exchange in a band of `+' or `-` 5 per cent around the Real Exchange Effective Rate and intervene when the REER moves beyond the band. "Why does the Committee recommend a rigid rule for FX management," Dr Bhalla asks.

Dr Bhalla also argues against the committee's decisions to bank P-notes, effective ban on foreign-based individuals from investing directly in the Indian market and the introduction of Indian bank dollar deposit schemes for foreign residents. Dollar deposit schemes will succeed only if Indian banks provide considerably higher returns to investors than what the investor obtains in his home country bank, Dr Bhalla argues.

Dr Bhalla also disagrees with some other recommendations such as a narrow band for the exchange rate to move, higher interest rates and no permission to convert dollar deposits into rupee assets. This is a similar situation to what prevailed in Thailand prior to the East Asian crisis and has been noted to be a major cause of the crisis, Dr Bhalla points out. "What the committee is saying is that we are very comfortable with short-term dollar deposits, but not at all comfortable with these deposits forming part of the savings pool of Indian firms," he says.

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