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Focus on signposts

The Tarapore Committee's road map for an increased convertibility of the rupee in a phased manner over the next five years seems well thought out. While current account transfers have been substantially liberalised in India, there are still some controls over the capital account. A fuller convertibility regime will allow practically unrestricted transfers of capital to and from the country and for a variety of purposes. However attractive that might sound, as the Tarapore Committee has pointed out, several important milestones will have to be crossed before it becomes possible. These include critical facets of macro-economic consolidation, especially fiscal consolidation and financial sector reform. Interestingly, almost all of them were emphasised in the report of an earlier committee in 1997, also headed by Mr. Tarapore. Almost nine years after the first report, the economy might be in much better shape, more closely integrated with the rest of the world and invite unprecedented attention from global investors. Yet the signposts look as far away today as they were in 1997. It is relevant to note that these previously unexceptionable macroeconomic goals are now questioned or have become controversial, though not in the context of the debate over convertibility. For instance, the Government's commitment under the Fiscal Responsibility and Budget Management Act to reduce fiscal deficits in a time-bound manner is seen as an unnecessary hurdle to resources mobilisation required for the Eleventh Plan. The latest report favours the option of public sector borrowing that would reflect more accurately the fisc's resource dependence on the economy.

More controversial is its advocacy of accelerated financial sector reform, especially in the area of ownership of banks. The recommendation to reduce government ownership in public sector banks to 33 per cent is highly unlikely to be accepted. In fact a legislation to that effect mooted by the previous NDA Government is in cold storage. However, most public sector banks require large amounts of capital even over the near term in order to meet the Basel II norms. If dilution of the government's stake is not feasible, other measures will have to be examined. There is substantial merit in the suggestion to make government-owned banks truly autonomous and professional and prepare them for intense global competition even before a fuller convertibility regime is in place. As was the case with the earlier report, there will be far greater interest in the milestones on the road map charted by the committee, rather than in full convertibility itself. The debate is likely to touch upon many of the topical issues of the day — for instance, the need to rein in foreign inward remittance to the stock markets through the mechanism of participatory notes. It is however noteworthy that on this particular issue the RBI has adopted a more cautious stance than the Government. By helping to focus on several important, interrelated issues of the macroeconomy, the Committee might have done a signal service.

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