The Financial Sector Legislative Reforms Commission (FSLRC),which submitted its report to the finance minister on Friday,undertook a very different exercise in drafting law. Instead of whipping up a hurried response to a crisis situation,as has been the dominant style in the UPAs tenure,this was a considered,two-year-long effort at financial sector regulatory reform. The FSLRC takes a rare fresh look at the law. Instead of tinkering with the text of the 60-odd laws that make up the Indian financial system,the commission has written a brand new law,the Indian Financial Code. Over 100 individuals spent two years on the project. By drawing in expertise and diverse viewpoints,the commission,led by Justice Srikrishna,heard all points of view and engaged with them critically.
Few things matter as much to making the market economy work as having a financial system do a good job of allocating the scarce savings of the country to get the highest possible growth rate. India has made some significant moves in financial reform,for instance,the equity market in the last 20 years,but the edifice of laws and agencies is unchanged. From 2007 onwards,it has been increasingly obvious that the strategy of tinkering at the edges,without interrogating the foundations,had run its course. The regulatory agencies are squabbling,an unending series of ponzi schemes is being uncovered,there is scandalous behaviour by banks and other sales agents,a non-existent bond market that is now choking infrastructure investment,and a potent inflation crisis.
Much has been written about the stasis in Indian economic policy reform. This is a sweet spot where the government can score. The FSLRCs rethink of the law constitutes fundamental economic reform of the kind that India is always criticised for failing to deliver on. Voters would not be adversely affected by the enactment of this law. Indeed,a new law that places consumer protection at the heart of financial regulation is the need of the hour. The only ones who will object to this law are the bureaucrats who occupy the existing regulatory bodies. It promises,therefore,a very big bang for the buck: a strong financial system will have a large impact on growth and inclusion,and the only voters who will be unhappy are the few dozen employees of financial regulators.