An interview on financial sector reforms in Business Standard

A conversation with Sudipto Dey and Jayshree P. Upadhyay in the Business Standard, 16 February 2015.

q: What is the relevance of the Indian Financial Code for a developing market like India?

Indian finance suffers from myriad problems. Most households are cutoff from finance; most firms suffer from financing constraints; consumers are routinely mistreated; the bond-currency-derivatives markets don't work; the monetary policy transmission is weak; we regularly suffer from great bouts of inflation; etc. These problems need to be diagnosed and solved. The IFC aims to create an environment for financial economic policy that addresses these problems.

q: The work on FSLRC began in the UPA regime. Has the change of political regime - from UPA to NDA - created any disconnect between the two governments on the provisions FSLRC?

No, I haven't seen any such disconnect. In my experience with financial reforms from 1993 onwards, the basic ideas and work plan have continuity across changes in government. Voters do not care about financial sector reforms directly : they do not have a view about (say) whether commodity futures are regulated by FMC or SEBI. Voters only care about the end product, which is that India should have high GDP growth.

The determining factor in financial sector reforms is the skill and capability inside the Ministry of Finance. When we have a strong and capable Ministry of Finance, progress is faster.

q: How does the IFC plan to handle the proposed convergence of regulators, given the multiplicity of regulations and laws that exist under different regulators?

The Ministry of Finance has to do the project planning about how the law will be enforced, once it is passed. That's true of all laws.

q: How should the different financial sector regulators prepare themselves for Indian Financial Code?

A valuable step towards the IFC future has been taking in the form of the Handbook on adoption of governance enhancing and non-legislative elements of the draft Indian Financial Code, which features the governance improvements from FSLRC that regulators can adopt right now. Existing regulators need to substantially re-engineer themselves to improve governance in this fashion. This will be ideal preparation for IFC.

q: There has been public debate on RBI's staunch dislike for the proposals of FSLRC and Indian Financial Code. What is your position on it?

Incumbent agencies generally oppose reforms. This is not surprising. India's interests are more important than RBI's interests, so we should not be stopped from making progress.

If I worked at the RBI, I would not speak about RBI's role, turf, powers, accountability, etc. This violates a basic principle of natural justice: "do not judge your own cause". It is human to crave for more power and less accountability; we should check our base desires.

q: How are we placed in terms of implementing the recommendations of FSLRC?

There are three tracks in the story:

  1. The Ministry of Finance is evaluating all the feedback that has come on the IFC and is refining the draft of the law.
  2. Regulators are reshaping themselves to come up to the good governance norms of the Handbook.
  3. The Ministry of Finance has setup `task forces' to construct four institutions that would be required for enforcing the IFC. These are : the FSAT, the RC, the PDMA and the `Financial Data Management Centre' (FDMC). This work is now a few months old.

q: How would the Indian financial market look like after implementation of Indian Financial Code and the FSLRC recommendations?

The IFC would improve the good sense in financial economic policy in a practical and down-to-earth sense. This would be a gradual process in that one by one, the regulations of today would get replaced by superior regulations. Over a few years, we would get the unfolding of a financial system that caters to India's needs.

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