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Two controversial proposals in budget

Separate debt management body will give relief to RBI

THIS TIME the Finance Minister's budget speech dwelt on some issues that had been doing the rounds earlier. The separation of the debt management function from the Reserve Bank of India and vesting it with an autonomous body functioning under the Government has been talked about since 2001.

This model, in vogue in advanced countries, is meant to ensure that the RBI carries its core central banking function of monetary management unhindered by debt management issues.

There is bound to be a transition period before the Government assumes the role. Many more announcements will be made and a roadmap drawn up. During that period it may be possible to evaluate the decision more critically.

It is also proposed to transfer the majority stake in State Bank of India, now held by the RBI, to the Government. The justification is that the banking sector regulator should not own a bank. This move has been highly controversial, not the least because there is no guarantee that under direct government control the country's biggest bank will have greater scope to function in an autonomous manner. There is also the issue of augmenting SBI's capital to meet international standards. The proposed changeover does very little to help in solving the problem. Both in its present form and in the future it will be in the public sector. The question of diluting the government stake does not arise in the present political climate. The Government has allocated Rs. 40,000 crore for buying out the RBI stake in SBI. But the RBI will declare the dividend that will include the purchase consideration. Hence the proposed transaction will be `deficit neutral' on government finances.

RRBs again?

The moves to strengthen the regional rural banks through a process of consolidation have already begun. They will now be encouraged to undertake other types of banking transaction also including those relating to foreign exchange and accepting NRE deposits. Simultaneously the RRBs have been asked to expand aggressively and will have the cover of the SARFAESI legislation (now applicable to mainline financial institutions) to pursue their recalcitrant borrowers.

These steps look attractive in a theoretical sense. However, like the local area banks (LABs) that were actively encouraged a few years ago but failed, RRBs may not deliver on government's expectations. Many of them will need to be capitalised. There are only four LABs functioning now. RRBs will also require plenty of restructuring — both conceptually and operationally — before they can expand aggressively in the ways the Government wants them to.

Relief for senior citizens

The Finance Minister has announced a scheme under which a senior citizen, who owns a house, can get a steady stream of return by mortgaging it with the National Housing Bank but can continue to occupy it. Such schemes may be popular in advanced countries but in India it is no different from raising a loan against one's house to generate liquidity.

Granted that owning a house gives a kind of security that extends far beyond the market value it may command, not many of the retired will be willing to mortgage their homes. Besides, not many of them can hope to redeem the mortgage on their own. So even in the best-case scenario they will be passing on an encumbered property to their children.

Another scheme that the Finance Minister has announced — to fund infrastructure by drawing down on foreign reserves — needs to be backed by safeguards before it is implemented. Basically, the scheme involves routing a small portion of forex reserves through two wholly-owned overseas subsidiaries of India Infrastructure Finance Company Limited for meeting the capital expenditure incurred overseas for infrastructure projects coming up in India. The same route may also be adopted for investing a portion of the reserves in relatively high yielding assets. The Government has tried to reassure the RBI (which has been having grave misgivings over similar past proposals) by offering to guarantee the repayment of its loans to the two subsidiary companies of IIFCL. It will be better if the RBI's apprehensions are allayed in a more transparent manner. Perhaps a ceiling on how much of the reserves can be so lent can be fixed statutorily. Besides, when finances per se are not the problem for the infrastructure deficit, what is the necessity to experiment with one strong feature of the external economy? A number of administrative measures have been announced. Mutual funds can operate dedicated infrastructure funds. Self-regulation by capital market intermediaries will be strengthened. There is good news for companies which desire to fund new projects by unlocking a portion of their holding in group companies. Such `exchangeable bonds' are however at a conceptual stage still. In what should be the biggest step forward in reducing the difficulties of investors in recent times, the Government has decided to make the Permanent Account Number (PAN) the sole basis for identification for all schemes. Investors do not have to carry multiple cards such as MAPIN and MIN.

Another welcome development is the raising of the tax deduction exemption threshold for bank deposits from Rs. 5,000 to Rs.10,000. Senior citizens, especially, will benefit. Interest on a bank deposit of up to Rs. 1,12,000 (at 9 per cent interest) will be spared the TDS.

Splitting of deposits over many banks may still continue and it is hoped that in the days to come the Finance Minister will enhance the exemption limit to fully reflect the cost of living. Bank deposits remain the most preferred investment avenue for senior citizens. Surprisingly, the Finance Minister made no mention of this genuine relaxation in his budget speech.

C. R. L. NARASIMHAN

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