Wise Up And Bite The Bullet

Updated: Dec 25 2002, 05:30am hrs
Non-resident Indian deposit schemes have now been in existence for 27 years. These schemes were the outcome of early attempts to attract inflow of funds from NRIs. Since these schemes were first initiated, the facilities for NRIs have been significantly liberalised. The foreign exchange crisis of 1990-91 revealed the extreme vulnerability of the Indian balance of payments as the NRI depositors, particularly those in foreign currency, proved to be fairweather friends. As at the end of March 1991, the NRI deposits were about 2.4 times the foreign exchange reserves. The authorities provided an exchange rate guarantee under the Foreign Currency Non-Resident Account scheme (FCNRA) which, in the event, proved to be very costly. In fact, India was obtaining assistance from the International Monetary Fund and the World Bank, and this assistance was dissipated in repayment of NRI deposits.

Recognising the horrendous costs of the FCNRA scheme, the authorities introduced a Non-Resident Non-Repatriable Rupee Deposit (NRNRRD) scheme in 1992 and Foreign Currency Non-Resident Banks (FCNRB) scheme in 1993 which enabled a smooth withdrawal of the FCNRA scheme. As of September 2002, the total NRI deposits amount to $26.7 billion or 42 per cent of reserves. In addition, there are the country cousins of the NRI deposit schemes in the form of the Resurgent India Bonds (RIB) and the India Millennium Deposits (IMD) which amount to another $9.7 bn. With the continued upsurge in reserves, to the current level of $68 bn, the time is apposite to consider a revamping of the NRI deposit schemes.

The authorities have been right in being generous with the NRNRRD holders by making these deposits repatriable. When the RIB matures in 2003, it would be prudent to repay these costly bonds without offering a similar scheme. The FCNRB scheme, though not provided an exchange guarantee by the authorities, carries an exchange guarantee by the banks and from the countrys viewpoint remains as costly as the erstwhile FCNRA scheme. When we talk in macho terms about the strength of the Indian rupee, it would only be apposite to wean the system away from exchange guarantees.

Over the next 12 months, the minimum maturity for the FCNRB scheme could be gradually extended and only a three-year maturity permitted. When the RIB matures, holders could have the option of going into the FCNRB scheme for three years or the Non-Resident External Rupee Account (NRERA) scheme or even withdraw funds from India. After the dust settles on the RIB, fresh deposits under the FCNRB scheme should be disallowed and the outstandings could be gradually allowed to run off.

Thus, by the time the IMD matures in 2005, there should be only one scheme viz. the NRERA scheme. With the recent bold initiatives on the Non-Resident Ordinary (NRO) Deposit scheme, this scheme has for all practical purposes become repatriable. It would therefore be necessary to closely monitor outstandings under this scheme. Eventually, the NRO scheme can be terminated and deposits under this scheme allowed to be merged with the NRERA scheme.

There would, no doubt, be a number of reasons given for retaining the status quo. First, it could be argued that with the possibilities of a conflagration in the Middle-east, oil prices could zoom up causing a drain on the foreign exchange reserves. Secondly, there could be fears that the RIB and IMD, on maturity, could drain out the reserves. Expressions of these fears could, in their extreme form, result in attempts to roll over these schemes. Needless to say, rollovers would be very costly. It would be recalled that repayment of the India Development Bond in 1996 was smooth despite the pressure on the exchange rate at that time and we need to give up our phobias of a repeat of the 1990-91 experience.

Thirdly, foreign banks may cry blue murder if the FCNRB scheme is discontinued. We need to look at it from the overall interest of the Indian economy. FCNRB money is not cheap when account is taken of the depreciation of the rupee. We should not get too euphoric about the recent appreciation of the rupee which is bound to be transient. The FCNRB is a luxury we can do without. Fourthly, it is argued that the RIB ($4.2 bn) and IMD ($5.5 bn) would be a drain and it would be best to build up a war chest to meet these outflows in 2003 and 2005. We need to note that both the RIB and IMD are very expensive and we would be better off without such schemes.

All these arguments could lead us to a policy of paralysis and we would lose a golden opportunity to restructure these liabilities which could become dangerous if we are ever to face a large current account deficit and inadequate capital flows. In such a scenario these NRI schemes could be destabilising.

In retrospect, it is easy to be critical of policy decisions to introduce the RIB and IMD, but even if one concedes the difficult and uncertain conditions under which these schemes were devised, continuing with high cost risky schemes at the present time when the foreign exchange reserves have reached a phenomenally high level would be totally unjustifiable. It would be best to let these two schemes run off without providing any artificial high cost props to attract reinvestment of these funds in India. It would be best to provide a single rupee scheme with repatriability viz. the NRERA and even here, the props should be gradually withdrawn.

While the Kelkar Task Force mercilessly guns down all tax exemptions for residents, it would only be appropriate if the special group looking into non-resident incentives also gradually scales down large tax benefits for NRIs. While there is a gradual phasing out of FCNRB funds, we should not stimulate interest of users of FCNRB funds as this will make it even more difficult to phase out the scheme. The present non-resident deposit schemes, together with the RIB and IMD, are equivalent to 57 per cent of the reserves. It is preferable to shed some reserves now with a corresponding reduction in the liabilities under these schemes. The time to restructure these liabilities is from a position of strength and not from a position of weakness. The time is apposite to undertake a careful and gradual restructuring of NRI deposit schemes.