The Reserve Bank of India has sent a strong message to the Centre to get on with the reforms process. In its Annual Report 2014-15, the central bank said that for a country as big and populous as India, reforms cannot be shots in the dark as that would subject the economy to greater uncertainty and risk.

“Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create. The Chinese term this ‘Crossing the river by feeling the stones’. It is an appropriate metaphor to guide our own reforms,” Raghuram Rajan, RBI Governor, said in his overview of the annual report.

The observations come in the context of the washed out Monsoon Session of Parliament when the NDA government could not get vital economic reform legislation passed. Key Bills that did not see light of day include the Goods and Services Tax Bill, the Right to Fair Compensation and Transparency in Land Acquisition, the Rehabilitation and Re-settlement Bill, and the Negotiable Instruments (Amendment) Bill.

“Economic growth is still below levels that the country is capable of. Second, inflation projections for January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates — whereby they forego income on existing borrowers in order to attract more new business — is muted,” Rajan said.

Regulatory reforms

Underscoring that a slow pace of regulatory reforms could lead to greater risk residing in the banking system, the RBI Governor said financial sector reforms need to move on many fronts.

In the financial sector, there is a need to increase efficiency through greater entry and competition. The RBI said the country needs more participation in its financial markets to increase their size, depth, and liquidity.

“Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices,” the RBI said.

Technology, according to the report, can be very helpful in reducing the costs of supportive frameworks, and can bring hitherto excluded populations into the financial fold. The RBI said that lower inflation and faster resolution of distressed assets will be among the top macroeconomic priorities in the immediate future.

The report noted that easing the doing of business has now become a widely cited constraint on the revitalisation of manufacturing. Areas that require significant changes include legal and regulatory environment, labour market reforms, tax regime and administrative environment.

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