Basu's forex paper, PM finmin review indicates govt action

CNBC-TV18's economic editor Siddharth Zarabi explains that chief economic advisor Kaushik Basu's paper on forex manipulation and the Prime Minister's detailed statement to the finance ministry listing the problems that needed to be addressed in the financial sector, are clearly indicative of the change of guard and attitude in the government.

Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video

Q: Kaushik Basu has written a paper that comes to the startling conclusion that restrictions on currency futures could curb forex manipulation. The conclusion is based on the practical policy engagement in 2011 and 2012 when the Indian exchange rate saw sharp fluctuations. Basu's comments come in the backdrop of the recent weakening of the Indian rupee which has depreciated by 28%. It's sure to draw attention, but will it draw a policy response?

A: If you weave the Prime Minister's comments on the exchange rate and tax problems with statements by Basu, there is an indication that Basu maybe asked to consider a option of staying on as his three-year contract as chief economic advisor is to end soon.

The paper deals with the art of currency manipulation and draws the basic conclusion that restrictions on currency futures can curb forex manipulation. The paper also talks about the role of central banks in emerging economies but there is no mention of the Reserve Bank of India or any mention of India at all anywhere.

The paper says that central banks can intervene to move exchange rates and there are profiteers who sort of exploit the inadequate understanding of the regulator with regard to currency manipulation. The paper also lists two common mistakes by central banks- firstly, inadequate regulation and that poorly targeted controls inflict collateral damage.

The paper, in the backdrop of criticism of the Reserve Bank of India's handling of the rupee when India's reserves at one of its highest levels ever, along with the Prime  Minister’s review of the finance ministry indicates a change in the government’s attitude towards the economy.

Q: The Prime Minister's statement says that there have been many factors which have contributed to this general negative mood and problems on the tax front need to be addressed. Do you infer a reference from the Prime Minister and now the finance minister, to the retrospective amendment?

A: Yes. On retrospective amendment, GAAR and certain aspects of the DTC. The fact is that the GST is stuck due the difference of opinion with the states who believe that the finance ministry has been shortchanging them on agreed compensation.

If you read the tax part of the Prime Minister's statement, it says that the many aspects of the financial sector like the mutual fund industry and the insurance sector need to be improved. The statement's contents almost accord it the status of a mini-budget coming just after almost one quarter of the current fiscal year comes to an end.