Sweeping Proposals

AN aspect of the Tarapore committee report on current account convertibility (CAC), which can only be considered as bewildering, is the sweep of macro-economic policy prescriptions that the committee has indulged in on a wide-ranging number of issues unconcerned with the social and economic costs associated with its proposals. Apart from the pre-conditions set in the form of fiscal consolidation, mandated inflation rate and monitoring of certain important indicators such as the neutral real effective exchange rate current account deficit, and the adequacy of foreign exchange reserves, the report dilates a great deal on the consolidation of the financial sector including reductions in reserve requirements, interest rate deregulation, progressive reductions in non-performing assets (NPAs), level-playing field between banks and non-banks on prudential norms, market participation, reserve requirements, and the interest rate regime. The committee also passes judgment on the structure of banking by suggesting that the so-called weak banks should be converted into what arc called narrow banks, that is, the incremental resources of these narrow banks should be restricted only to investments in government securities and in extreme cases not only should such banks not be allowed to increase their advances but there would need to be a severe restraint on their liability growth which implies that they be allowed to die a natural death.