The Hindu Business Line : A hundred small steps

The draft report of the Committee on Financial Sector Reforms, headed by Dr Raghuram Rajan, former IMF chief economist and now professor at the University of Chicago’s Graduate School of Business, could not have come at a more appropriate time with the financial turmoil in the industrialised countries providing a dramatic backdrop for change in this neck of the woods where financial innovation is still in its infancy. The contextual references are awesome; innovation has to move in tandem with the sobering lessons of the meltdown in the most sophisticated markets. The Committee draws some valuable maps to India’s financial future.

At the outset the Rajan Committee makes clear that its mandate is overarching: to locate financial growth and inclusion with stability. Precisely for that reason, its suggestions have to ensure consistency across a number of policy areas. Thus the new paradigm it urges has to recognise that the poor require efficiency, innovation and value for money as much as the “emerging Indian multinational” does and these come from deregulation, free entry and competition. The financial sector, the Committee feels, requires the enabling environment of the telecom sector whose reforms earlier paved the way for the current growth. But that analogy is problematic. For one, the changes were the result of hits and misses over time; for another, the new technology — the mobile — threatened just one government monopoly service provider and filled a vacuum, for it was an altogether new service. Financial reforms are conditioned by multiple pressure points: public sector entities, coalition politics and employee unions that necessitate complex navigation over the direct thrust. Deregulation, an essential paradigmatic virtue for the Committee, is a loaded concept and has worked fitfully, yet competition, its outcome, came into play, enlarging the private sector and progressively liberating its public sector counterparts immeasurably as the aviation and postal services sectors will attest. The Committee’s analogy of crisis-led reforms being akin to driving with a gun at your head with its attendant results is vivid but misplaced. The evidence for any other kind of societal change through history, temporary or permanent, is rather thin on the ground.

Yet the Committee gets it right when it prefers a “hundred small steps” to “large, usually controversial policies”. It shows deep understanding when it confesses that “India mulls over many issues far longer than some would like, but eventually takes the right step.” With the financial turbulence in the most sophisticated markets now showcasing just how difficult it is to “encourage growth and innovation while working harder to contain risks”, India faces daunting challenges. The US crisis provides cues, for instance, that regulators need to look beyond their bailiwick at “systemic consequences” of market distortions. All in all, a report for dangerous and exciting times.

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