Redraft the policy framework

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Exceedingly well written, the Raghuram Rajan Committee’s draft report is an excellent effort at thinking about the public policy issues affecting Indian finance. Alongside the Percy Mistry Committee report, which focuses on the external dimension, it adds up to a comprehensive picture of where India has to go. The two reports, put together, offer a forward-looking picture that replaces the financial and monetary thinking rooted in a planned economy framework that currently characterises Indian finance.

When policymakers sought to “plan” the Indian economy, their addressed five key elements. Banks were dominated by government ownership, and the resources of all banks, PSU or not, were controlled by the MoF and RBI. Financial markets were either banned outright, or hobbled. An extensive licence-permit raj was in place, under which financial firms had to request government permission for every small change in product or process. Monetary economics was all about funding the fiscal deficit, and after the ways and means agreement of 1997, about exchange rate pegging. Integration with the global economy, however, put this framework under stress; so an integral part of this package deal was capital controls induced by a fear of globalisation.

This repressive framework was enthusiastically implemented by politicians and bureaucrats who claimed that this was all being done to help the poor. This worldview was propagandised in all official documents, was shared by most economists, and permeated the reflexes of the public, including journalists.

Starting from the early 1990s, three key events upset this happy equilibrium. The first was in the real economy. Indian businesses had to grapple with delicensing, competition and globalisation. FDI was welcomed, trade barriers were removed, and the licence-permit raj substantially taken apart. This embrace of foreign technology and capital worked very well. The economic upturn has made it harder to sustain xenophobia. Today, businesses are globalising. And if they buy the best low-cost steel in the world, it is increasingly infeasible to tell them not to obtain the best low-cost financing and financial services in the world.