On 1 September 2006, the RBI’s coffers were brimming with $165 billion of foreign exchange reserves, and rising with every passing week. It’s a far cry from May 1997, when our reserves were $28.1 billion, and when the Tarapore I report was released.

 

To me, the most astonishing aspect of Tarapore II is how little it reflects the changes in India’s economic situation between 1997 and 2006. In 1997, when India’s GDP was 40% lower than today’s, when its average growth rate was 5.5% and its reserves were at $30 billion, Tarapore I recommended calibrated gradualism. It continues in the same vein for an economy whose average growth is around 8%, whose entrepreneurship is recognised globally, and whose forex reserves are $165 billion. And I’ll bet that in 2011, if there were a Tarapore III under the backdrop of a CAGR of 7.5% and $300 billion of reserves, it would again recommend calibrated, incremental gradualism. As the French say, “Plus ça change, plus c’est la même chose” (“The more things change, the more they remain the same”).

 

To be sure, there are changes for the better in Tarapore II. For instance, it recommends that the overall ECB ceiling under the automatic route should be raised, and ECBs having 10 and 7-year maturities be gradually placed outside the ceiling. It suggests that the foreign investment ceiling for Indian companies be raised from 200% of their net worth to 400%. It recommends increasing mutual fund investments abroad from $2 billion to initially $3 billion, abolishing various ceilings on NAV and individual fund limits and allowing other SEBI-registered portfolio management schemes to operate under this scheme. It suggests that individuals be allowed to increase remittances in a phased manner from $25,000 per year to $200,000. These are welcome steps.

 

Yet, the language is of a Humphrey Appleby world, where RBI gnomes are the all-knowing controllers of all foreign currencies and transactions, who will do what they shall when they ought and in the fullness of time. It is as if we are in a world fraught with dangers where global capital marauders are waiting to find the tiny chinks in our monetary armour to pillage the currency and destabilise the economy; and where the only saviour is our Horatio of Bank Street, who stands omniscient and all-powerful to systematically strike down the cuff linked barbarians at our gates.

 

Consider two recommendations to understand the futility of this approach. Tarapore II is concerned about excessive speculation. Thus, it recommends that RBI should manage the exchange rate along a ±5% band around the real effective exchange rate (REER). Yet, it is obvious that if you mandate an explicit intervention band, you openly encourage speculation. Second, the banning of participatory notes (P-notes). We want more portfolio investments and more private equity; yet we want to ban foreign non-resident investors from participating in the Indian capital market. Instead of reducing the transactions costs of such investors, harmonising capital gains taxes and encouraging foreign investment flows in debt and equity, Tarapore II recommends an immediate banning of P-notes. Not only does this ignore the well thought out recommendations of the Lahiri Committee, but also signals the return of the license-permit raj.

    

In economics, the search for perfect conditions to exactly sequence reforms has only one outcome — endless discourses on minutiae while the rest of world takes courage and leaps ahead. That’s what Tarapore II risks doing. And I bet its successor report in 2011 will be of the same genre. Because controllers hate making themselves redundant; and reports are good ways of ensuring that they remain in business.