Rangarajan Committee on Balance of Payments

Dr. C. Rangarajan, former Governor, Reserve Bank of India who headed the high level Committee on balance of payments submitted its report on June 4, 1993. The Committee made the following findings and recommendations for correcting balance of payments:

1. The Committee stressed the fact that a realistic exchange rate and a gradual relaxation of restrictions on current account transactions have to go hand in hand.

2. In the medium-term care has to be taken to ensure that there is no capital flight through liberalized windows of transactions under invisibles. At the same time there is no escape from a very close control overall capital transactions so that future liabilities are kept under control.

3. The Committed suggested that Current account deficit of 1.6 per cent of GDP should be treated as ceiling rather than as target.

4. The Committee had given number of recommendations regarding to foreign borrowings, foreign investment, and external debt management. The following are the very important recommendations among them:

  • Government must exercise caution against extending concessions of facilities to foreign investors, which are more favorable than what are offered to domestic investors and also against enhancing external debt to supplement equity.
  • A deliberate policy of prioritizing the use to which external debt is to be put should be pursued and no approval should be accorded for any commercial loan with a maturity of less than five years for the present.
  • Efforts should be made to replace debt flows with equity flows. However, foreign direct investment would contain both debt and equity, and the system of approvals is applicable to all external debt. The approval of debt linked to equity should be limited to the ratio of 1:2.
  • On the question of encouraging foreign investment, the Committee recommended that a national law should be seriously considered to codify the existing policy and practices relating to dividend repatriation, disinvestments, non-discrimination subject to conditions, employment of foreign nationals, non-expropriation and sanction as also servicing of external and commercial borrowing.
  • Recourse to external debt for balance of payments support would have to be discouraged unless it is on concessional terms or with very long maturity.

5. The Committee recommended that no sovereign guarantee should be extended to private sector since it will give rise to issues of adequate control over management, performance, and discrimination between domestic and foreign companies.

6. The minimum foreign exchange reserves target should be fixed in such a way that the reserves are generally in a position to accommodate imports of three months.

Source: Scribd.com