Notwithstanding the global financial shake-up, former IMF chief economist Raghuram Rajan has stuck to his guns on pushing ahead reforms in India’s relatively closed financial sector. If at all, his final report, submitted to the Planning Commission last week, tries to make it easier for the government and the regulators by sequencing and prioritising reforms.
Rajan identifies the “low-hanging fruit” as proposals on financial inclusion, improving markets and expanding credit infrastructure. “These are not controversial, do not conflict with any political party’s views and require little legislative effort,” says the report.
Seeking speedy implementation of these, Rajan singles out the need to roll out a unique national ID number to offer access to a linked no-frills savings account for every household. This will help the government transfer all payments to the poor such as wages under the employment guarantee scheme directly into their accounts. To prevent exploitation and settle grievances, setting up of an Office of Financial Ombudsman also ranks high in priority.
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Allowing domestic hedge funds, eliminating securities transaction tax and opening up currency- and interest-rate derivatives market to foreign institutional investors are reforms that do not require any legal and institutional changes, the report says. Further, quantitative restrictions both on foreign institutional investment in domestic g-secs and on Indian institutional investors’ overseas investments can also be done away with within the existing framework.
The government can then move on to the next set of “technically-simple-but-difficult-to-implement” reforms, given the lack of consensus among technocrats and regulators. These relate to monetary policy, capital controls, bank branching, allowing more banks and improving land tilling and registration. “Administrative, rather than political, leadership is required here,” says Rajan. Technocrats have strongly different views on these with the RBI hitherto keeping a tight leash on most of these areas. Finally, there are the “technically-difficult-and-politically-controversial” set of reforms. Rajan concedes that given their legislative nature, these are the toughest to implement.
Expectedly, issues such as reducing government control in the financial sector and regulatory reform fall in the last lap. Hence, the committee has suggested building more acceptance of these reforms through a mix of debate and experimentation.
Cleaning up, step by step
Low-hanging fruit
•Unique national ID and no-frills savings account for all households
• Financial ombudsman
• Scrapping STT, allowing FIIs in currency & interest rate derivatives
Technically simple but difficult to implement
• Monetary policy that focuses only on inflation
• Freeing bank branching
• Full capital account liberalisation
Technically difficult & politically controversial
• Reducing govt control in financial sector institutions
• Reforms of the regulatory framework
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