People's Democracy(Weekly Organ of the Communist Party of India (Marxist)
September 10, 2006
On Fuller Capital Account Convertibility
The Polit Bureau of the Communist Party of India (Marxist) issued the following statement on September 4, 2006.
THE Reserve Bank of India has released the Report of the Tarapore Committee, which was set up to prepare a roadmap for capital account convertibility, on September 1, 2006. The CPI(M) had, at the very outset, expressed its opposition to the move towards fuller capital account convertibility, when an announcement in this regard was made by the Prime Minister at Mumbai on 18th March 2006.
The Tarapore Committee has recommended a phased increase in the cap on outward remittances by resident Indians to $ 200000 in five years and the removal of restrictions on overseas investments by Indian non-Bank Financial Companies and Corporates. This would facilitate increased capital outflow from India at a time when the Government itself claims that domestic savings is constraining domestic investment. Besides this will increase the possibility of massive capital outflows by resident Indians following sudden reversal of “investor sentiments.” 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 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.
The nature of capital inflows into India in the recent past is a cause of serious concern. The latest RBI Report on Foreign Exchange Reserves shows that the ratio of short-term debt to foreign exchange reserves has increased from 4.2 per cent at end-March 2004 to 7.0 percent at end-March 2006. Similarly, the ratio of volatile capital flows (cumulative portfolio inflows and short-term debt) to reserves increased from 35.2 per cent at end-March 2004 to 43.2 percent at end-March 2006. Rather than taking note of such serious developments, the Committee has suggested that “the RBI should undertake an in-depth examination of the coverage and accuracy of these data.” Thus data from the RBI itself has been challenged by the Committee, since the data did not conform to its premeditated conclusions. Given such an arbitrary approach, the assessment of the Committee that the current level of foreign exchange reserves at $ 151.6 billion are “comfortable in relation to various parameters”, cannot be taken seriously. The recommendations related to allowing foreign corporates directly investing in Indian stock markets or raising capital through convertible rupee bonds and liberalising norms for FII investment in the domestic debt market including government securities, are all 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 crash experienced in the stock market in May 2006 which was precipitated by heavy fund pullout by FIIs, has thoroughly exposed the volatile nature of such capital inflows.
The Report notes that the “Preconditions/Signposts” recommended by the 1997 Tarapore Committee, in terms of the gross fiscal deficit of the Central Government and the average effective CRR for the banking system have not been met till 2006, even when they were supposed to be attained by 2000. The target inflation rate has barely been met, although its sustainability is doubtful in the context of the recent inflationary trend. All this point towards both the impracticability, if not the undesirability, of meeting such arbitrary fiscal, monetary and banking policy targets set in the name of moving towards capital account convertibility, as if all other economic policy objectives like employment generation, poverty alleviation, social sector achievements and development of agriculture and industry are less important. The Committee has nevertheless continued with the same approach through its suggested “Concomitants for a Move to Fuller Capital Account Convertibility”. Besides recommending strict adherence to the FRBM targets, it also goes on to suggest that the Central Government should generate a revenue surplus to the tune of 1.0 per cent of GDP by 2010-11 in order to meet its repayment liabilities. This extreme display of fiscal conservatism is also accompanied by a call for Central Bank autonomy, an euphemism for taking monetary policy out of the purview of any democratic accountability. Moreover, there are a host of recommendations regarding the banking sector including bringing down government stakes in public sector banks to 33%, allowing industrial houses to own stakes in Indian banks or promote new banks and doing away with the cap on voting rights in the bank boards, all meant to promote the interests of the private corporates at the cost of public sector banks. The fact that such sweeping recommendations related to fiscal, monetary and banking policies have been made in a backdrop, where farmers are committing suicide in our country due to unbearable indebtedness and the commitments made in the NCMP on employment, agriculture, health and education are crying out for more fund allocation, show how much the Tarapore Committee is out of sync with the current Indian realities.
There are a few recommendations of the Tarapore Committee with which the CPI(M) agrees. They include 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. However, these had already been recommended by the RBI and the CAG much before the Tarapore Committee was set up. These should therefore be considered on a standalone basis.
The CPI(M) is opposed to all the other recommendations of the Tarapore Committee related to greater liberalisation of inflows and outflows of capital. Dilution of such capital controls will 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 FIIs, Indian residents would also be able to take large amounts of money out of the economy without any restrictions. The National Common Minimum Programme is committed to reducing the "vulnerability of the financial system to the flow of speculative capital". The Polit Bureau of the CPI(M) calls upon the UPA government to strictly adhere to that commitment and reject the Tarapore Committee recommendations for moving towards fuller capital account convertibility.