Notwithstanding the global financial shake-up, Raghuram Rajan has stuck to its guns on pushing ahead reforms in India?s relatively closed financial sector. If at all, his report has only tried to make it a bit easier for the government and the regulators, by sequencing and prioritising reforms.
Not surprisingly, Rajan has advocated focusing on the easy things first. The ?low hanging fruit?, according to the report submitted to the Planning Commission late last week, are politically correct proposals on financial inclusion, improving the markets and expanding the credit infrastructure. ?These are not controversial, do not conflict with any political party?s views and require little legislative effort,? says the report candidly.
Seeking speedy implementation of these, the Rajan report has particularly singled out the need to roll out a unique national ID number to offer access to a linked no-frills savings account for every household. This will help the government transfer all payments to the poor such as wages under the employment guarantee scheme directly into their accounts. To prevent exploitation and settle grievances, setting up of an Office of Financial Ombudsman, also ranks high in priority.
Allowing domestic hedge funds, eliminating securities transaction tax and opening up the currency and interest rate derivatives market to foreign institutional investors (FIIs) are reforms that do not require any legal and institutional changes, the report points out. Further, quantitative restrictions both on FII investment in domestic g-secs and on Indian institutional investors overseas? investments can also be done away with within the existing framework.
The government can then move on to the next set of ?technically simple but difficult? to implement reforms, given the lack of consensus among technocrats and regulators. These relate to monetary policy, capital controls, bank branching, allowing more banks and improving land titling and registration. ?Administrative, rather than political, leadership is required here,? says Rajan. Technocrats have strongly different views on these with the Reserve Bank of India hitherto keeping a tight leash on most of these areas.
Finally, there are the ?technically difficult and politically controversial? too set of reforms. These, Rajan concedes, are the toughest to implement since they are legislative in nature. Expectedly, issues such as reducing government control in the financial sector and regulatory reform fall in the last lap. Hence, the committee has suggested building more acceptance of these reforms through a mix of debate and experimentation.