Paulson pushes for further financial sector reforms

Written by Economy Bureau | Mumbai, Oct 29 | Updated: Oct 30 2007, 05:15am hrs
US Treasury Secretary Henry Paulson on Monday called upon India to accelerate reforms to open up its economy and the financial sector in particular. Paulson also asserted that China needed to move more quickly towards a market-determined currency. Paulson said India was mostly on the right path to modernise its financial sector, with a flexible currency, but China, with its tightly controlled yuan exchange rate, was increasingly the focus of protectionist sentiment around the world.

Very often around the world, if someone doesn't like globalization, the face they put on it is the face of China, the US treasury secretary said at the US India CEO Forum Infrastructure Investment Conference.

Paulson lauded India for allowing the rupee to appreciate but warned that limiting capital flows would hurt the country's competitiveness. India is on the right path to reduce various risks. India has allowed greater flexibility in the exchange rate in recent months, and the appreciation in the rupee has helped to reduce inflationary pressures, he noted.

"Limits on debt and equity financing, and asset allocation resctrictions on financial institutions, are impediments to putting resources to their most productive use," he added without directly mentioning the recent steps taken by the market regulator Securities & Exchange Board of India (Sebi) on investments through participatory notes.

Further he opined that administrative restrictions of capital flows are blunt instruments and can have unintended consequences. They tend to inhibit efficiency and lose their effectivness over time. "I encourage India to continue liberalising such restrictions. Steps to broaden and deepen the domestic financial sector will also help mitigate the risks posed by greater capital flows.

Paulson said that India can take a number of steps to become even more competitive. These measures include reducing requirements that financial institutions hold large amounts of government debt, reducing requirements for banks to provide credit to certain priority sectors, and removing various restrictions and caps on foreign investments.

The US Treasury Secretary made a strong argument in favour of development of Mumbai as an international financial centre. "We understand that Indian officials are were concerned that as Mumbai gained strength as a major financial centre, increased capital flows could increase inflationary pressures, destabilize domestic financial markets or add to exchange rate volatility," he added.

Paulson said Wall Street stood ready to help India build Mumbai into a major capital market centre, particularly in the development of a domestic bond market that would provide long-term financing for much-needed infrastructure development.

He said the United States supported India's ambitious plans to attract public-private partnerships to help finance its infrastructure needs, but said this would require transparent and independent regulatory frameworks, where government entities do not act as both regulator and services providers.

"Investors, especially those who must make long-term commitments as in most infrastructure projects, want certainty in their operating environments," Paulson said.