Last week, the managing director of the International Monetary Fund, Christine Lagarde outlined the multi-lateral institution’s changed approach to liberalisation of the capital account, noting how Malaysia’s imposition of capital flow controls in the wake of the 1997 Asian financial crisis was “ahead of the curve”.
The conventional wisdom among lenders such as IMF then was that free cross border capital flows were good in themselves. And bang in the middle of that crisis was when a committee headed by Savak Sohrab Tarapore submitted its report on India’s road map to capital account convertibility. In May 1997 — when the speculative attacks on the Thai baht hadn’t really gone far — the Tarapore panel set out three important pre-conditions for embarking on capital account convertibillity. These were fiscal consolidations along with a lowering of the government’s debt burden; low inflation (targeting it an average of 3 to 5 per cent); and strengthening of the financial system by bringing down the level of bad loans to 5 per cent of total loans.
Lagarde and many others may not acknowledge, if at all they know or remember, what the Tarapore report had said. But almost two decades later, it appears that Tarapore was the one who was truly “ahead of the curve.” That’s because the former deputy governor of the RBI, who died in Mumbai on Tuesday was mindful of the experience in Argentina, Philippines, South Africa and many other countries — and how India could land up in their place by freeing up its capital account without focusing first on price and macroeconomic stability. For western multilateral lenders, it took the 2008 global economic crisis to realise this.
Tarapore was a key lieutenant of the RBI Governor, C Rangarajan, when India was battling the balance of payment crisis in 1990-91 and in the next couple of years when the Narasimha Rao government started opening up the economy. It was a period when the country’s financial markets were opened up to overseas investors, a transition was taking place from a fixed to a more market-determined exchange rate, and global capital adequacy and loan loss provisioning norms were being made applicable to Indian banks.
Tarapore was also present at the signing of the landmark agreement between the Centre and the RBI to phase out ad hoc treasury bills in 1994. It basically ended the era of the automatic monetisation of fiscal deficits and government borrowing without any restraint. Few could articulate the logic behind introduction of these measures — spanning monetary policy, central banking, debt management, exchange rate policy and financial sector reforms — as elegantly as Tarapore.
But as he moved towards the fag end of his professional career in the RBI, many in industry and business were quick to dub him as a classic monetarist — a la Paul Volcker — who ‘killed’ domestic industry through adoption of a tight monetary policy in 1995-96, as inflationary pressures built up alongside a weakening of rupee. The Rangarajan-Tarapore duo’s actions, no doubt, contributed to an extended period where the Indian economy grew well below potential. But many detractors also, later on, acknowledged that the focus on macroeconomic stability and lowering inflation was what laid the foundations for the “golden decade” of growth that followed.
In the words of Rangarajan, Tarapore did not mind being branded a ‘hard liner’ when it came to being a crusader against inflation and his strong belief in the independence of central banks. As Percy Mistry once put it, the two had a long and symbiotic relationship, where genuine differences in views were not only tolerated but nurtured.
What set Tarapore apart was his professional, personal and intellectual integrity. That’s what drew respect from YV Reddy who reckons that he was the embodiment of integrity and dignity. And he had good reasons too. When Reddy, who was banking secretary, was considering quitting the civil services after being passed over for one of the top jobs in the government, it was Tarapore who persuaded him and then Rangarajan to come on board the RBI in 1997.
It is a measure of his professional skills and ability that even when he was low down the pecking order, successive governors — going back to IG Patel, M Narasimham, Manmohan Singh and RN Malhotra — would seek him out for his advice or insights. And those insights continued even two decades after he left the job in 1996 through syndicated columns and books, fighting on what he perceived was an attack on the RBI’s autonomy with the implementation of the FSRLRC recommendations.
Few had as many delightful anecdotes to share as much as Tarapore — some of which were on offer last Friday when this writer met him at home with a central banker. He is one of the last of, what some would call, a dying breed of true central bankers.