Issues In Financial Sector Reforms
S S Tarapore
UBS Rs 375/235 pages
This is a collection of articles originally published in this newspaper
in 1998. Through these S S Tarapore successfully brought to public
debate a large number of issues relating to monetary, fiscal and external
sectors as well as reforms in the banking and non-banking sector.
In academic circles, the problem of choosing between inflation and
growth is usually stated as determining the weights given by the central
bank to the conflicting priorities of raising output and reducing
inflation. Since there is a trade-off between the costs of inflation
and the benefits of growth resulting from surprise inflation, the
central bank, whose unstated aim is to maximise social welfare, faces
a pervasive dilemma: should it give in to the politicians who benefit
monetary expansion in the short turn or should it obey the dictates
of sound macroeconomic management which strives to maintain a balance
between the two?
Familiar to students of game theory as a Barro-Gordon game, in such
a macroeconomic policy game, a banker who puts a much higher weight
on controlling inflation is defined as a ‘conservative banker’. If
we were to find an appropriate adjective for SS Tarapore, former deputy
governor of the Reserve Bank of India, in such a game the answer would
lie in his view that central banks “have to consider control of inflation
as their dharma and hence make it their central mission”. Dharma can
be fickle mistress in such matters and it is perhaps just as well
that Mr Tarapore is on the side of the angels. The poor, after, all
care more about inflation than growth. This inflation-containing objective
of monetary policy is described in the article ‘The RBI’s Central
The nitty-gritty of financial reforms are discussed with clarity
and simplicity in the sections on banking sector reforms and non-bank
financial institutions. While advoca-ting lighter regulation and stricter
supervision for the banking sector, he proposes the strictest of regulatory
frameworks for NBFCs.
The options facing the central bank and the finance ministry in
respect of the management of monetary and fiscal policies are discussed
in the sections on monetary management, macroeconomic policies and
fiscal issues and public debt management. In these the author’s monetarist
position, that inflation is a monetary phenomenon and that the central
bank is best suited to controlling it rather than raising growth,
comes through in nearly every article.
The most interesting section, however, is the one on the liberalisation
of the capital account. As chairman of the Committee on Capital Account
Convertibility (CAC) that submitted its report in 1997, his views
on the subject are well known. However, in contrast to economists
like Jagdish Bhagwati, Joseph Stiglitz, Paul Krugman and Jeffrey Sachs
who, he argues, followed the herd instinct after the East Asian crisis
and advised us “to realise that capital controls may after all be
a good thing”, Tarapore continues to advocate the opening up of the
capital account. He objects to “the barbaric system of capital controls
on resident individuals” and argues in favour of the CAC Committtee
recommendation of allowing $25,000 capital outflow per annum per individual.
The section on public debt, containing his warnings on the volume
of the government’s borrowing programme, are as relevant this year
as they were when they were written and indeed whenever the politicians
got their hands into the till. It is a pity that so few pay attention.
I would recommend this book not only to professional bankers and
economists but also to the general reader and, should such a creature
actually exist, the intelligent politician wanting to get an idea
of the issues in financial sector reform today.
Or, as Paul Samuelson wrote in his introduction to a book on development
planning by the late Sukhomoy Chakravarti, Bon Apertif.