Redraft the policy framework

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Tuesday , April 08, 2008 at 2305 hrs While a messy licensing environment continues to be in place, it is now useful to think of India as being effectively “open”—in the sense that money will find its way in and out of the country.

These three developments add up to a sea change in the environment of financial and monetary policy. However, a full rethink of the policy itself was not done. The avenues for progress in finance unleashed in the early 1990s had petered out by the end of the decade. By 2001, when the last major leg of the transformation of the equity market fell into place, finance had settled into sullen stagnation.

What was needed was a new way of thinking about finance and its role in the economy, and a new monetary policy framework. This framework must be designed for India as a fast-growing and fast-globalising market economy. Put together, the Percy Mistry and Raghuram Rajan reports supply this full picture. The Percy Mistry report is international finance focused, and emphasises the international dimension. The Raghuram Rajan report is focused on domestic finance: it addresses critical questions like financial inclusion, credit infrastructure, enhancing competition, policy issues in banking, and the two-way linkages between sound macroeconomic policy and sound financial sector policy.

The latter report combines world class intellectual firepower and original research with the ground reality as seen by the CEOs of financial firms who were members of the committee. It covers a breathtaking range of issues, and, as the preface suggests, has drawn on knowledge from a very wide array of top people. It is an unusually well-written report, and is likely to have considerable influence. The report is particularly effective in documenting how the ancien regime gives a raw deal to poor people, thus undermining a key claim of the socialist framework. It offers concrete and tangible market-based solutions through which poor people will do better.