The Hindu Business Line : New roadmap for free float

Nine years ago the first S. S. Tarapore Committee examined the journey to capital account convertibility. At the time a comprehensive road map for the purpose with 1999-2000 as the target date for full capital account convertibility (CAC) after a set of conditions had been met was suggested. Needless to say, those conditions were not fully met, and CAC took a backseat though capital controls were eased along the way. With the recent resurrection of the issue by the Prime Minister, a newly constituted committee, chaired by Mr Tarapore again, has drawn up another road map setting 2011 as the target date for free float of the rupee.

This time the Committee's nostrums seem more appropriate given the strong fundamentals of the economy, the healthy foreign exchange reserves, a financial system that seems better geared to deal with external capital flows, and a more liberalised use of forex. Some suggestions are towards liberalising the policy further, others appear fresh initiatives, and one seeks a return to controls; the last elicited a dissent note. As a fresh move, the Committee has suggested that the distinction between Non-Resident Indians and foreigners be narrowed for investment purposes. Among the new initiatives, one wants foreign corporates to be allowed to invest in Indian equity and debt. This is welcome as it would deepen the market and reduce the leverage any one block of investors would have on price movements. By the same token, it suggests more liberal external commercial borrowings by corporates with the removal of the cap on ten-year loans in the first phase and raising the automatic approval for such loans to $1 billion by 2011. Assuming that the forex reserves can only improve, the Tarapore panel has suggested raising the ceiling for investments abroad by Indian corporates, scheduled banks and individuals. The Committee wants the Government to reduce its stake in scheduled banks to 33 per cent from the present 55 per cent. This will certainly meet with resistance from the policymaker just as the idea of allowing industrial houses to start banks will be frowned upon by the Reserve Bank of India.

Surprisingly, the Tarapore panel wants to abolish Participatory Notes as investment instruments even as it would like to grant foreigners more access to the Indian stock market. PNs, or contract notes, account for a substantial chunk of the total foreign institutional investment. Insisting on greater transparency would be more appropriate than calling for a ban. Barring this, the Tarapore road map is a welcome initiative. But in the run-up to 2011, the Government will have to reduce its fiscal deficit to around 3 per cent from 4.4 per cent now, a difficult task given the contrarian pulls at the Centre, the need to align Customs duties further and to keep the economy on a steady course.