Excerpts: In 1997, the first Tarapore report gave a three-year-roadmap for CAC. Since then, there has been a substantial progress on key milestones like reduction in banks' NPAs and inflation rates, and yet you have recommended a five-year roadmap now.
It is necessary to understand that India can avoid the pitfalls faced by some countries only if we give serious attention to the attainment of what the FCAC Committee calls "concomitants". The committee has pointed out that the present system of repaying borrowings out of fresh gross borrowings generate a dangerous spiral which brings to the fore the question of debt sustainability. The committee recommends that a substantial part of the revenue surplus be earmarked to repayment of government borrowings. The authorities should move over to the concept of a public sector borrowing requirement, which would be approximately three percentage points of GDP higher than the gross fiscal deficit.
The committee stresses on a number of other concomitants "" strengthening of the banking system, widening and deepening of the securities and forex markets. Attainment of these concomitants would take time and in this context the committee recommended a five-year time-frame with three phases. This will allow well-calibrated implementation of the measures as well as stock-taking. The gradualist approach has served India well.
The panel wants a complete ban on any further issue of PNs and phasing out of the existing PNs. This is exactly opposite of what the Lahiri Committee has recommended.
Both committees had majority and minority views, and both went along with their respective majority views. There were concerns about the anonymity of the PN route. It should be noted that the committee has recommended that non-resident corporates should be allowed to invest in the Indian stock market through Sebi registered entities who will be responsible for fulfilling the know-your-customer norms. Clamping on suspicious flows enhances the integrity of markets and encourages healthy flows. Ultimately it is a judgement call.
How do you react to the voices of dissent?
I have answered your question on the report while those who have dissents have already spoken to you.
The panel is in favour of bringing down the government's stake in public sector banks to 33 per cent. It wants all banks to be brought under the Companies Act and also has reservations about the RBI stake in the SBI being transferred to the government. You don't trust the government as the owner of banks. Why do you want corporations to be allowed to float banks?
At present, different groups of banks are regulated under different legislative frameworks and the committee was of the view that banks should be regulated on the basis of a single legislative framework. The Narasimham Committee recognised that the banks would need more capital and, as the government would not be able or willing to provide this capital, the committee recommended that the minimum share of government should be reduced from 51 per cent to 33 per cent. The Narasimham Committee had recommended that the regulator should not be owner. The intent was not that a regulator (RBI) should pass on ownership to an even bigger regulator (government). At present, 50 per cent of banks are in a bind regarding raising capital as the government owns the nationalised banks. If the RBI ownership in SBI is passed on to the government, then 75 per cent of the system would be in a bind. It is not an issue of the FCAC Committee not trusting the government.
The committee has noted that of the new private sector banks, those which were set up with institutional backing were successful. It also recommended that on a case-by-case basis, industrial houses and non-bank finance companies should be allowed to have a stake in Indian banks or promote new banks. There are now efficient safeguards to prevent the pre-1969 problems of promoter industrialist houses pre-empting a predominant share of a bank's credit portfolio.
What, according to you, are the three most important recommendations of the committee?
The attainments of concomitants; liberalisation of outflows by resident individuals, corporates and mutual funds; and the provision of incentives for rupee denominated foreign currency debt.
The RBI has set up a task force to go over the recommendations of your committee...
The setting up of the RBI Task Force to untie the knots in the forex management system has been misinterpreted in the media as a task force to examine the recommendations of the FCAC Committee. The terms of reference are in accordance with what the committee suggested "" to iron out the inconsistencies in the present regulatory framework, streamlining procedures, delegation of powers, etc. This is vital for the move towards FCAC.
More often than not, reports such as this one, just gather dust ...
In some cases the authorities implement recommendations quickly. In some cases the authorities take a longer time as inter-regulatory consultations are necessary. In some cases, the authorities' perceptions are different from that of committee's and the measures are shelved. To fully comprehend the process, one needs to appreciate the difference between the advisory function and the executive function.
