As the Commission is in the last six months of its tenure, it has released an Approach Paper on October 1, 2012. The 35 page Paper brilliantly sets out what the Commission envisages as the new financial regulatory architecture to meet the requirements of the next two decades. The Approach Paper sets out an outline of the Commission’s tentative recommendations. Apart from some perfunctory comments on the Paper in the media, there has not been any meaningful public debate. The Approach Paper is an important document and legal experts, economic analysts, central bankers, government and the public at large need to focus attention on this important document. The Commission seems to have dextrously avoided any dialogue with those who have a contrarian view and those with hands on experience with what Susan George calls “How the Other Half Dies” (1976).
Constituency For Economic Reforms
As Yashwant Sinha, former Finance Minister, aptly puts it: “The constituency for reforms is limited to the government of the day, the economic commentators, the corporates and the English language newspapers. Most political parties remain staunchly opposed to reforms… A major weakness in our planning process has been the top down approach. Delhi knows best; the fact of the matter is Delhi knows nothing” (Economic Times October 25, 2012).
Commission’s Elitist Approach
It is undeniable that economic reforms have unleashed the growth potential of the country but unfortunately, large tracts of the population still live in dire poverty and the reforms have accentuated disparities. For reforms to be sustainable they have to be people-centric. It is unfortunate that the impression one gets is that the Commission is elitist in its approach and the framework unwittingly makes an already dominant government even more over-bearing over the financial sector.
Cut RBI Down to Size
Witness the Approach Paper’s slant of cutting down the Reserve Bank of India (RBI) to size by taking away a large part of the domain of its operations, ostensibly, on the ground that the RBI should exclusively focus on monetary policy. The Bond- Currency-Derivatives markets will be totally out of the purview of the RBI.
Capital Controls Out of RBI
A glaring feature of the Commission’s recommendation is to take away capital controls from the RBI and to lodge this in the Ministry of Finance-all in the name of Full Capital Account Convertibility! Consistent with the stance of the Approach Paper it can be inferred that the RBI would have no say in exchange rate management and forex markets, and therefore, forex reserve management. The RBI’s handling of the 1991 forex crisis is internationally recognised, as is its gradualist approach to capital account convertibility. This whole issue is not only whether India abolishes capital controls altogether but an issue of managing the entire external sector. It would be a monumental blunder to go along with the FSLRC recommendation to strip the RBI of its role in the forex market on the basis that there would be a purist approach of not intervening in the forex market. It is naive to believe that the industrial countries do not intervene in the forex markets — all that they do is to use more subtle techniques of affecting their exchange rates. It is dangerous to transplant a model from Ruritania! It is not a mere issue of setting out a viable legislative framework. This is a clear case of the Commission framing policy rather than legislation. The Commission errs in presuming that the role of the RBI can be undertaken more efficiently by yet another organisation; and if the Commission thinks it appropriate to leave this segment totally unregulated or supervised, the Commission is living in a Utopian world. If the Commission persists with this insensate recommendation in its final Report this recommendation should be unceremoniously tossed out as commonsense cannot be legislated!
RBI Under Financial Sector Appellate Tribunal
The commission fails to protect the sanctity of the RBI. The present Special Appellate Tribunal which essentially deals with SEBI related decisions would be expanded into a Financial Sector Appellate Tribunal which will also hear appeals against the RBI for its regulatory functions. The FSLRC needs to appreciate that the central bank is a unique institution and lumping it along with other financial institutions is a reflection of the proclivity of the FSLRC to downgrade the RBI.
The Approach Paper says: “A uniquely important policy problem is that of financial inclusion. This forms the rationale for the development agenda in finance. The agenda relates to (i) the development of missing markets, such as the bond market, and achieving scale and outreach with nascent markets… The Commission will debate the questions and make recommendations emphasising enumerated objectives, enumerated powers and the rule of law” (Paragraph 93 of the Approach Paper).
The FSLRC would surely know that financial inclusion is now the focus of attention in the financial legislation the world over. In the Indian context there is considerable work undertaken in the government, the RBI, the financial system and other organisations such as Skoch Consultancy which has provided yeoman service. Governor RBI Dr. D. Subbarao pithily sums up the issue of inclusive growth: “… the quest for inclusive growth draws from a powerful lesson of development experience-that growth has no meaning or indeed even no legitimacy, if those at the bottom of the pyramid get left behind”. The Commission shows a surprising lack of sensitivity to these issues and its distilled thoughts on a subject of vital importance reflect poorly on the Commission. The Commission would be a laughing stock if it persists with it present thoughts on this subject.
The Approach Paper takes a decisive and elaborate stance on issues which fit into the Commission’s preferred financial architecture while other vital issues are given the short shrift. The Commission stands exposed with its obsessive preoccupation with the “bond market” even when it comes to discussing the vital issue of financial inclusion; the Approach Paper resorts to grandiloquent posturing on this vital subject. The FSLRC, should, as an overriding priority, re-examine the issue of financial inclusion and come up with meaningful and relevant recommendations. Reforms, to have meaning, must touch the lives of the Common Person; on this criteria the Commission clearly falls short.