The CPI(M) today backed some of the recommendations of the Tarapore Committee, including phasing out of participatory notes, doing away with tax exemptions for NRIs and a review of double taxation avoidance agreements. The party wanted the government to accept these on a standalone basis and to reject others.
In a statement, the CPI(M) Politburo opposed liberalisation of inflow and outflow of capital, arguing that dilution of capital controls would lead to greater flow of speculative financial capital into the economy.
It will also increase the risk of currency crisis since along with non-residents like the FIIs, Indian residents would also be able to take large amounts of money out of the economy without restrictions, the statement said. These arguments would form part of the party's note to Prime Minister Manmohan Singh, likely to be sent tomorrow, Left sources said.
The Tarapore report will be discussed at the Politburo meeting in Kolkata next week. The Left parties will also raise the issue at the coordination committee meeting with the UPA, expected to be held later this month after the prime ministers return from the NAM summit, according to sources.
Opposing the recommendation for a phased increase in the cap on outward remittances and removal of restrictions on overseas investment by Indian non-banking financial companies and corporates, the party said this would facilitate increased capital outflow from India at a time when the government itself claimed that domestic savings were constraining investment.
This would also increase the possibility of massive capital outflows by resident Indians following sudden reversal of investor sentiments, the party said.
The easing of norms for external commercial borrowings, including their end-use by Indian corporates and banks would encourage reckless borrowing, especially for speculative purposes, the party said.
The Tarapore Committee has failed to draw the most important lesson from the spate of currency crises faced by several developing countries over the past one decade. The common feature of all the crisis-afflicted countries was their liberalised capital account, that CPI(M) said.
The party also opposed the suggestion for bringing down the government stake in public sector banks to 33 per cent and allowing industrial houses to own stakes in Indian banks or promote new banks.
It expressed serious concern over the nature of capital inflows into India in the recent past. Citing an RBI report on foreign exchange reserves, the CPI(M) said the ratio of short-term debt to foreign exchange reserves had increased from 4.2 per cent at the end of March 2004 to 7 per cent at the end of March 2006.
During the period, the ratio of volatile capital flows (cumulative portfolio inflows and short-term debt) to reserves increased from 35.2 per cent to 43.2 per cent.
Rather than taking note of such serious developments, the committee suggested that the RBI undertake an in-depth examination of the coverage and accuracy of the data, the CPI(M) statement said, accusing the Tarapore Committee of adopting an arbitrary approach.