OFF THE SHELF

Bon Apertif

Issues In Financial Sector Reforms
S S Tarapore
UBS Rs 375/235 pages

Ila Patnaik

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 Mission’.

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.