NEW DELHI : The Communist Party of India (Marxist) on Monday urged the Union Government to reject the Tarapore Committee recommendations for moving towards fuller capital account convertibility.

The party asked the Government to strictly adhere to the commitment made in the Common Minimum Programme of reducing "vulnerability of the financial system to the flow of speculative capital,"

Reacting to the committee report released last week, the CPI (M) Polit Bureau, in a statement, said it had expressed opposition to the move when Prime Minister Manmohan Singh made an announcement in this regard in March.

Increase risks

The party was opposed to the recommendations relating to greater liberalisation of inflows and outflows of capital. Dilution of such capital controls would only lead to greater flows of speculative finance capital into the Indian economy. "It will also increase the risks of a currency crisis, since along with non-residents like the foreign institutional investors, Indian residents would also be able to take large amounts of money out of the economy without any restrictions."

However, the party agreed with a few recommendations such as banning fresh issues and phasing out of participatory notes, doing away with tax exemptions enjoyed by the NRIs and review of the Double Taxation Avoidance Agreements. These were already recommended by Reserve Bank and the Comptroller and Auditor General much before the Tarapore Committee was set up, and emphasised that these should, therefore, be considered on a standalone basis.

Investor sentiments

The recommendation of a phased increase in the cap on outward remittances by resident Indians and removal of restrictions on overseas investments by Indian non-Bank Financial Companies and Corporates "would facilitate increased capital outflow from India at a time when the Government itself claims that domestic savings is constraining domestic investment."

Besides, this would increase the possibility of massive capital outflows by resident Indians following sudden reversal of "investor sentiments."

"Important lesson"

The recommended easing of norms for external commercial borrowing, including their end-use by Indian corporates and banks, would encourage reckless borrowing, especially for speculative purposes.

The statement said, "The Tarapore Committee has failed to draw the most important lesson from the spate of currency crises faced by several developing countries over the past one decade.

The common feature of all the crisis-afflicted countries was their liberalised capital account.

"India could avoid such a predicament precisely because of the capital controls, much of which has survived till date despite the recommendations to remove them by the first Tarapore Committee of 1997."

Cause for concern

Referring to the Reserve Bank report on foreign exchange reserves, it said the nature of capital inflows into India in the recent past was a cause of serious concern. Instead of taking note of such developments, the committee challenged the RBI data, as it did not conform to its "premeditated conclusions."

The recommendations relating to allowing foreign corporates directly invest in Indian stock markets or raising capital through convertible rupee bonds and liberalising norms for FII investment in the domestic debt market were meant to increase portfolio investments into India, which have not contributed anything to the Indian economy so far, besides creating a bubble in the equity market.

The statement said the May 2006 stock market crash, which was precipitated by heavy fund pullout by foreign institutional investors thoroughly exposed the volatile nature of such capital inflows.

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