Convertibility And Borrowings

So now we are about to gather the first fruits of the Tarapore report on capital account convertibility. The finance ministry has announced that as a consequence of the committees recommendations, the authorities have decided that the external commercial borrowing limit will not cover 10-year loans. But before we rejoice at this unstartling piece of liberalisation it would be as well to understand what it means. Let us begin at the beginning.

The government in its wisdom had determined that Indians collectively should not take additional loans in foreign exchange in excess of $8.5 billion in total for this year. Like all such authoritarian decisions, the government provides no arguments in support of its resolution. It is a fiat determined by those who claim to know more than we do about our needs and prospects to borrow externally. In the circumstances, it seems quite sensible not to give reasons for this prohibition for there may simply be no good reason. Instead we are invited to conclude (a) that borrowing may be too much of a good thing and (b) that those two nannies of our economy, the World Bank and the IMF, will not approve if we undertake too many foreign exchange obligations.

 

The reader must understand that the World Bank keeps a special record rather like the Jain diaries of all the monies developing countries borrow from the rest of the world. One might ask if they keep a similar book for developed countries, that is, for example, a similar record of how much France has borrowed from Germany or how much England has borrowed from America or most pertinently how much America borrows from the world. That apparently is not the concern of the World Bank. Equality of nations means paying special attention to low and middle income developing countries, particularly those who are either moderately or severely indebted.

Once you feature in this thick World Bank book, you are on the international bankers watch list. If, like India, you are classified as a moderately indebted low-income country a MILIC, in the unattractive acronym of the World Bank the finger of suspicion is on you. There may be just a hint that profligacy should be curbed or simply a recognition that the burden of external debt may be too much for that country to bear. Like the Jain diaries, the very inclusion of your name in the book of World Debt Tables will suffice to warn lenders to be vigilant.

Or this presumably is what our administrators believe. This is the justification for their interference in regulating external borrowing. They do not want us to be on any long-term black list of global lenders. It is of no relevance to them that businessmen must have some valid reasons for borrowing externally. That it is for business people to decide what they should and should not pay. Their thought process is unaccustomed to interpreting market signals. So the answer they have come up with is that we should voluntarily borrow less. By voluntary they do not mean it to be the chosen decision of the individual borrower and lender, but that our own economic experts, with their vast international experience, are making the choice on our behalf. Mind you, they have never themselves soiled their hands with commercial negotiations. Their experience is all top-table stuff, chatting with Michel Camdessus or James D Wolfensohn. But we can now crystallise their thinking. It amounts to this:

If we allow lenders and borrowers to determine what they want, Indians may borrow too much and the foreigners lend too much. This will eventually lead to Latin American-type problems where orderly business was disturbed by according to this way of thinking excessive lending and borrowing. In place of such market-determined movements we will introduce a rationing scheme whereby we can decide who will borrow what, how much and for how long.

The trouble is that words like rationing and the State determining priorities are straight out of the first Soviet five-year plan. They do not go well with words like liberalisation and convertibility. Fortunately, the Tarapore Committee, with S S Bhalla as the sacrificial ram, has shown a way to square the circle. They have on the one hand plumped for full capital account convertibility and on the other hand chosen a slow road to it. But gestures have to be made. The government has, therefore, relaxed the ceiling of $8.5 billion by saying that loans that are large enough and for long enough need not be included within the cover.

To be outside the restrictions, the loan would have to be for a maturity period of an average of 10 years. Now that word average is quite tricky. It means that if you plan to repay a loan by equal instalments then the final repayment is not 10 years away but 20 years away, well beyond the three years that the Tarapore Committee promises full convertibility. Moreover, such loans are not to be taken by all and sundry for any old project. They are reserved for infrastructural projects which only the top companies can afford.

It is in such slow and cautious ways that we intend to proceed to full convertibility. However, one should not perhaps complain. As the wise Chinese sage Lao-tzu pointed out: A journey of a thousand miles must begin with a single step. So we must applaud this single step though what it has to do with convertibility escapes me for the present.

It has been said of Manmohan Singh that his great achievement was to change the mindset of the Indian people on the liberalisation issue; and certainly did. But he might have done greater good if he had changed the mindset of the finance ministry. The trouble with them is that they are looking for a compromise between the present regulated system and the system that must operate in a free economy.

Unfortunately, there are no intermediate steps. Paths and road maps are the wrong words in this analogy. Perhaps the proper one is that the free market economy and the regulated economy are like two distinctly separate cars. You cannot drive one by sitting in the other. You may achieve the same speed of motion by pressing the accelerator on one and brake in the other, but if you want to test the other car, it is absolutely necessary to step out of one vehicle and climb into the other.

The right thing to do is to bring in full convertibility now and reintroduce such controls as prove necessary in the light of future experience. There is no merit in fooling the people with feeble moves like making esoteric changes in the parameters for external commercial borrowings. The people will see through all these antics. Then our masters will realise the truth of another one of Lao-tzus sayings: People are difficult to govern because they have too much knowledge.