Quite independent of the global economic uncertainty, we have created our own financial turbulence, which has no underpinning in any dispute on the manner of recovery. The differences, instead, have a lot to do with the personalities involved.
The systemic impact of the bad blood has created a situation where it is quite possible for smart operators to seek out regulatory arbitrage to profit from. Even more, for an economy that is growing fast and will accelerate further, turf dispute between the regulators means they will take their eyes off the road. Just imagine a car accelerating to 140 kmph with the driver distracted.
Turf disputes, in India, like any other economy, have happened before too. But at that time the nation was not accelerating at this pace and hence there was room for course correction without disruption. At present, RBI is unhappy with the finance ministry for pushing through the Bill on setting up the financial stability and development council; at a lesser level, there are issues on pay structure for its employees; Sebi is unhappy with Irda for not being on the same page on phasing out distributor commissions, as well as with the finance ministry for not appreciating the need to maintain tax breaks on equity-linked schemes and so on. In turn, both of them have made no bones about being asked to park their fees in the Consolidated Fund of India and therefore being brought firmly under the financial control of the finance ministry, for just about anything. PFRDA has so many things to be sore about, including the lack of a statutory status and more importantly, whether its distributors should get commissions or not, i.e., the Sebi or the Irda model and, in turn, with the latter as to who will be the sole arbiter of the pension market.
None of these, it is true, came about suddenly. Yet they have become acute enough for the regulators to air them publicly. Remember, too, that all of these have manifested despite the presence of the High Level Committee on Capital Markets, where the regulators meet and the finance ministry too is represented. So it is obvious the fractures go deeper and need a different solution. But since they have reached a flashpoint under the current finance minister Pranab Mukherjee, he has to take time out from handling the massive workload the UPA government has saddled him with, to ease these tensions. Postponing these to another time, another day, could prove to be costly.
Again a caveat is in order. None of these by themselves are big enough to upset the growth rate of the Indian economy. But together they vividly convey an impression of a racing chariot with horses pulling in all directions. Not the best advertisement for the financial sector of the country.
The cumulative impact of these differences are right now not apparent in the fast developments of the capital markets but are too serious to be ignored. We have already seen how the contradictory signals are impacting the mutual fund industry. Related data on the absolute flat trajectory of retail participation in the equity markets despite the largest offering of public sector scrips ever in the Indian markets may also be bearing out the impact of these developments.
Why are these differences material? Because, unlike many sectors, India?s financial sector is still juvenile. Pranab Mukherjee has said that the deposit base of the banking sector is too narrow for the benefit of the other India. The investment in capital markets, too, is limited and the pension sector is yet to take off.
Over the past few years, the regulators had broadly agreed on a series of reforms meant to make the financial sector reach more people. The recent hassles upset that synergy. At a point when we are planning to begin some massive changes like mobile-based banking, merging of shares and mutual fund trading on the same exchange-based platform and making pension a viable market-linked option among others, the regulators need to talk amongst themselves and with the finance ministry without suspecting an unwritten agenda. Only then will we get to know where all of them stand on the course set out by the Raghuram Rajan committee. One suspects that like the earlier Percy Mistry committee report, this too has slipped beyond the radar of our helmsmen. Political reasons? Maybe.
Meanwhile, there is a clutch of others meant for the specific sectors like the RH Patil committee report on the bond market and the D Swaroop committee on financial literacy. The Bimal Jalan committee report, too, is yet to be finalised, but events like the Sebi-MCX spat seem to have overtaken them.
Sometimes early next year, Mukherjee will decide on a new chief for Sebi and soon after that for RBI. The Irda chief will, of course, leave office in 2013 and the PFRDA chief has just been appointed.
But irrespective of the tenure of the respective chiefs, it is now necessary to institutionalise a sort of public proclamation of confidence of the finance minister in the set of regulators who man these critical offices. Is it possible at this juncture for the minister to also simultaneously articulate his idea of the reforms and the men for the job?
subhomoy.bhattacharjee@expressindia.com