Convertibility Conundrum

When a fellow columnist writes the final mot juste on a subject his colleagues tend to be faint in praise. I do not wish to follow that example; therefore let me say at the outset that what needs to be said about the Tarapore report on convertibility has been said by TCA Srinivasa-Raghavan (Business Standard, June 6, 1997) in the one telling sentence. He writes: If the government waits for all the preconditions (recommended in the Report) to be satisfied the rupee will remain unconvertible possibly until June 2097.

That was what many of us had anticipated would happen; but our one hope was in Surjit Bhalla who to use Churchillian language seemed one strong figure standing up against long, dismal drawling tides... of wrong measurements and feeble impulses. My views on many ideas would have been different to his in various ways but he seemed the only one who embodied the hopes and dreams of many who see free convertibility as the first step in the renaissance of the Indian economy. Now he has succumbed, under the weight of Indian orthodoxy with a 162-page report that should have been written in one line: In the fiftieth year of Indias independence, from August 15, 1997 the rupee is freely convertible.

 

For those of us who believe in convertibility the need is not to explain why we should move to it. Rather the boot is on the other foot. Convertibility is the obvious and natural order of things. There really is as little rationale for the authorities to tell an individual how much foreign exchange he should use as there is for them to tell me how many visits I should make to my mother who lives in Bombay. In both cases I use scarce resources, in one case I buy them from the Airlines, in the other from a foreign exchange dealer; but so long as I pay the price why should I be further restricted by the cohorts of Reserve Bank from using my resources as I wish?

There is, of course, an alternate theory to that of consumer choice. It is perfectly respectable, perfectly logical, perfectly valid and with a long history that goes back to Plato. The theory is that all my resources should ultimately be used for the benefit of the State. The problem has always been who should decide for the State. Plato thought up an elaborate training structure which put together the notion of Israeli Kibutz that is you belong to the State from birth with the notion that the British adopted a superior civil service that trains people to be the rulers and guardians of our society. Both these ways of thinking were consciously borrowed from Plato.

It is not surprising that in India with our Brahiministic culture the idea of guardians who toiled for the general good was very attractive. Sadly the dream has faded with time as the guardians and their political masters have put their hand in the common pot.

We are now without ideology. Those who grieve the demise of Nehruism, weep not just for the destruction of the State but also for an end to public nobility. The new aristocrats, the new Brahmins have all been dragged into a welter of commercial ideas where free markets led by slick transactors dominate the world. It is an unattractive vision. So the balanced middle-of-the-roaders find a comforting half way house in allowing the individual to decide for himself on how frequently he should travel to Bombay so long as the authorities control foreign exchange. Tarapore was chosen to set the framework for Reserve Bank dabbling in a more liberal regime, and that precisely is what he has done.

The real issue that the Tarapore Committee should have tackled is to justify any controls short of full convertibility. It is in this sense that the boot is on the other foot. What they need to explain is what purpose in a free economy will be served by targeted exchange rates, controlled fluctuations of market determined rates. The very basis of exchange controls no longer exists. It is not good enough to be told each time these matters are discussed to say look at what happened in Mexico or look at Latin America as if their crises have been caused by floating exchange rates and convertibility.

The truth is that a capital account convertibility is more likely to reduce inflation, perhaps even help fiscal adjustment.Convertibility should not be looked upon as some fruit that a hard working people must earn...It is not to be looked upon as a gift that the Reserve Bank will bestow upon poor benighted Indian when he have shown ourselves to be worthy of it.

Convertibility is simply an economic tool. It enables society to achieve a stable balance between its internal and external prices. In this system full convertibility that is including capital account convertibility will prove less distorting than partial convertibility.

This is not the place nor is there any space to write upon these issues. We will no doubt have many more opportunities to plough through the details of the Tarapore report. At this stage all one would wish to say is that it is an opportunity lost. Every now and again a government comes into being that could take us forward at a faster pace than we are going. One such opportunity was the convertibility report. We all knew that there was not the smallest likelihood that we would advance very much in the direction of convertibility, but it could have given us an opportunity to examine the logic of our controls. The starting point of the report should have been an assumption of full convertibility and then we should have worked backwards to legitimize the present system.

Unfortunately that has not been done. Instead we are now left with the frustrating problem of how we can shorten the hundred year servitude that TCA Srinivasa- Raghavan has forecast for us. For on one point there should be no doubt; nothing worthwhile will happen in the next three years. Even if the fiscal deficit comes down to 3.5 per cent of GDP, even if inflation rate drops to a half percent, no significant change will take place for at that point we will be told that the economy needs to sustain its good performance before convertibility can be given as a reward to the people.

The transformation of the Indian economy from the bullock cart age has many hurdles. The gravest of these is a natural predeliction for gradualism. So great is our desire to test the waters before we take the plunge that we are not likely to learn to swim let alone go the distances that our growing population requires.