The Report of the Committee to Review the Facilities for Individuals under FEMA, 1999 (August 2011) was submitted to the Reserve Bank of India (RBI) within the stipulated period of three months. In a milieu where committees/working groups invariably violate the stipulated timeframe, the Chairman of the Committee, Ms. K. J. Udeshi, deserves kudos for strictly adhering to the time limit.

It is 20 years since India initiated a well-calibrated liberalisation of the draconian forex regulatory system. Under the much-feared Foreign Exchange Regulation Act (FERA), there was an erroneous perception that resident individuals were the worst offenders deserving the harshest penalties.

Despite the scrapping of FERA and its replacement in 1999 by the Foreign Exchange Management Act (FEMA), barbaric regulations continued for individuals. In high policy circles there was a fear that if resident individuals were allowed to take out of the country, say $25,000 per annum, there could be such a large exodus that there would be no money supply left in the country!

INDIVIDUALS INCONVENIENCED

The policy liberalisation on current and capital account was effected first for corporates, banks and other institutions and last for individuals. Although it has been several years since the forex regime was liberalised, the present procedures would do the erstwhile draconian regime proud. While corporates, banks and other institutions are able to work their way round these procedural hurdles, individuals are plagued by these procedures.

Despite the liberalisation of the forex policies, officials, who enjoyed tremendous discretionary powers, continued with procedures that were reflective of the “scarcity and control” mindset of the FERA days. As such, procedures have thwarted the liberalisation of policies, particularly for individuals.

Even today, individual entrepreneurs are hauled over the coals for being successful in acquiring companies, treated as violators of the regulations and required to go through ‘compounding', or payment of a monetary penalty for technical violations.

In this context, the Udeshi Committee Report comes not a day too early. As the Report puts it, a law aimed at liberalising the system has been constrained by excessive regulation. The Committee rightly stresses that forex transactions should be as easy to carry out as rupee transactions. The procedures reflect a fear of “compensatory payments” between residents and non-residents, harking back to the erstwhile FERA regime.

CUMBERSOME DOCUMENTATION

At present, the procedures require a battery of documents to prove the bonafides of a transaction. It is demeaning that users of foreign exchange are required to declare that they are not violating the regulatory framework. Although the banking system denies the existence of such forms, the ground reality is that the present columnist has been forced to sign this humiliating form in different banks. With the delegation of powers from the RBI to the Authorised Dealers (Ads) and from the Ads to their operating desks a system of multiple regulators has emerged.

The Committee pinpoints the problem at the operating level wherein it is “safer” to use the old route and just say “No”. The incentive structure for frontline staff provides for harsh penalties for counter staff in the case of a wrongly given permission (Type 1 error) in contrast to wrong denial (Type 2 error).

As such there is no incentive to say yes” whereas saying “no” is safer.

The Committee documents glaring inconsistencies. For instance, funds of non-residents are classified as “repatriable” or “non-repatriable even though non-resident rupee funds in the Non Resident Ordinary Accounts (NRO) are now repatriable up to $1 million. An individual non-resident can have a joint account with a resident, while a resident cannot have a joint account with a non-resident. With the large diaspora, most families have close relatives who are non-residents.

Denying parents the right to hold joint rupee accounts with their children is a denial of a fundamental right. What is more is that a large number of residents, including government and RBI officials, unknowingly violate this insensate regulation! Again, a resident can send a gift in foreign exchange to a non-resident but is denied the right to give a rupee gift to a non-resident — this once again is observed in the breach. The Committee painstakingly sets out a host of specific procedural issues and makes concrete suggestions for rectifying them.

The Committee is of the considered view that the present “procedural knots” have to be untied to enable the present level of forex liberalisation to be effective.

The great merit of the report is that it sets out a long list of procedures which need to be amended/scrapped. The Committee is confident that its recommendations can be implemented in the current financial year (2011-12).

The top management of the RBI should mandate its officials to find ways of implementing the report and not to dissipate their energies in adducing reasons for not implementing the recommendations. The motto of the Foreign Exchange Department in implementing change should be, in the words of J. Krishnamurti: “absorb, don't resist”.

(The author is an economist. >blfeedback@thehindu.co.in )

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