'Transfer of RBI's State Bank stake is fiscal fudge'

The proposed transaction involving the transfer of Reserve Bank of India's shareholding in the State Bank of India to government "is the worst kind of financial engineering", S S Tarapore, chairman of the RBI committee on capital account convertibility (CCAC), today said.

As per the proposal,Tarapore said, the government would show the purchase of RBI holding in SBI as a capital expenditure while RBI's capital gain would be transferred to the government's revenue receipt as part of the RBI's profit.

The gross fiscal deficit would remain unchanged while the revenue deficit would shrink.

"This is a clear case of a fiscal fudge of Rs 29,000 crore...The lack of fiscal transparency will be a major setback to financial sector reforms," he said.

"As it is 50% of the banking system (nationalised banks) have a capital financing problem, but this transaction would extend the capital financing problem to 75% of the banking system. Should an amicus curiae raise the issue as a public interest litigation (PIL)?" he said at a conference on Capital Account Convertibility organised by the Administrative Staff College of India (ASCI) here.

Pointing out that foreign banks would have bigger stake in Indian banks after 2009, Tarapore emphasised the need for allowing industrial houses to set up or buy a stake Indian Banks as well before 2009.

"Can the Indian banking system afford to remain in splenetic isolation while the rest of the Indian economy integrates with the global economy?", he questioned while expressing apprehensions that the banking system would be the "Achilles' Heel" in any move to fuller capital account convertibility (FCAC).

In the context of FCAC, he said that CCAC had stressed the need for monetary policy transparency. The objectives of the monetary policy should be jointly enunciated by the RBI and the government and put in the public domain. Once the policy objectives were clearly set out, RBI should have "unfettered instrument independence".

ASCI court of governors chairman, M Narasimham, said we need to practice fiscal discipline on continual basis to derive the benefits of FCAC.