The last control raj

THE Tarapore report on capital account convertibility CAC would have been considered daring in 1991. In 2006, it is a disappointing list of control measures. When the prime minister had asked for a guide on how to implement CAC, this is not what he possibly could have had in mind. He had argued that the economy is big enough and confident enough to handle convertibility. He hadn8217;t asked for an RBI warning against convertibility. But that is what the Tarapore report has given us. It is a report to RBI from a committee 8212; with two notable dissidents 8212; that thinks like RBI.

Not surprisingly therefore the report8217;s theoretical framework ignores the fact that today gross flows on the current and capital account are more than 90 per cent of GDP. There8217;s de facto convertibility for many economic agents, but not the Honest Resident Indian. He doesn8217;t figure in the mountains of wisdom doled out in the report, which assumes that with some tweaking and tinkering, RBI will be able to continue to control the oceans of money that flow in and out of this country. Right in the first chapter when the committee sets the stage for convertibility 8212; the freedom for Indians to take money in and out of the country to buy foreign assets, and for foreigners to buy Indian assets 8212; the fear of crisis and foreigners is reinforced, making a case for caution and controls. A table of capital controls practiced by various countries is presented. There8217;s no similar loving attention to the benefits of convertibility. The cursory reference to why CAC may not be such a bad thing really shows up the committee8217;s preference 8212; it is unhappy at the prospect of India opening up further.

Surjit Bhalla8217;s dissent note clearly indicates the lack of big picture thinking. Take the case of participatory notes PNs. PNs 8212; instruments bought by overseas entities that want to invest in Indian capital markets but are not registered with SEBI 8212; are market responses to high transaction costs. The committee8217;s ban on PNs, which RBI also wants, is not supported by the findings of the Lahiri committee, which deliberated at great length on the issue. RBI will happy with this report. That8217;s the problem.