Market commentators in India love to clamour for Big Bang reforms. But when Big Bang reforms are actually at hand, they are subjected to very little scrutiny. The detailed tomes put out by high-level committees and expert panels are more often skimmed through, than actually read. The risk is even greater with a report as voluminous as the 440-page Indian Financial Code, scripted by the erudite Financial Sector Legislative Reforms Commission chaired by Justice BN Srikrishna. The Code, which is yet to be implemented, proposes a complete reboot of all the laws governing India’s financial sector. But so far, debates on it have generated more heat than light.
It is in this context that the former central banker SS Tarapore’s pithy little volume Unified Financial Code — Is India Ready? is a must-read for policymakers, financial sector players and students of finance. This book is a compilation of short articles on different aspects of the Financial Code that the author penned between 2010 and 2015.
As critiques go, this book cannot be termed an unbiased account of the FSLRC’s work. In fact, the author is unabashedly critical of the Financial Code and goes hammer and tongs at some of its proposals, especially where they involve the central bank. But the book is still an excellent read because it is well-argued and gets down to the brass tacks on what drastic reforms may really mean for financial institutions like the RBI and the financial sector.
Apart from a crisp and no-holds-barred writing style, the volume is replete with Tarapore’s uniquely colourful turn of phrase, which spices up such dull subjects as the setting up of a public debt management agency, the structure of a monetary policy committee and whether we really need a unified financial regulator.
Three-pronged attack The author’s most stinging criticisms are reserved for three key proposals contained in the Financial Code. The first is the decision to strip the RBI of its public debt management role. The FSLRC has taken the view that the RBI’s mandate of managing government borrowings is in direct conflict with its monetary policy role. (After all, the Centre would love to borrow cheap, but high interest rates are necessary to quell inflation). It, therefore, suggests that RBI be divested of this role and that an independent Public Debt Management Agency be set up, with mixed representation from the Centre and RBI.
Tarapore’s counter is that such a separation has already been suggested by previous RBI committees. But it has been tough to put into practise because, to really make public debt management truly independent of the RBI, the Centre would have to shrink the size of its runaway deficit, free banks from their statutory liquidity ratio requirements and allow RBI a free hand in conducting open market operations that calibrate systemic liquidity.
The second recommendation that earns his ire is the constitution of the Monetary Policy Committee (MPC) for rate-setting. An eight member MPC has been suggested by the FSLRC with five external members, two RBI members and one silent non-voting member from the Ministry of Finance. Veto powers have been suggested for the RBI Governor, whom the FSLRC, inexplicably, wants to re-designate as ‘Chairman’.
A different game Tarapore argues that, with RBI in the minority in the MPC, it would inevitably have to kow-tow to the external members and the Big Brother nominee from the government. Yet, with the RBI governor carrying veto powers, he would take the flak for missing inflation targets. Stating that “A match referee cannot also be the third umpire, the umpire on the field, a player and also a spectator”, he suggests that the Urjit Patel committee’s recommendations be considered instead.
A third idea that the book opposes is the one that consumer redressal mechanisms for the financial sector be clubbed under a single Resolution Corporation to make grievance resolution proactive and speedy. The Code recommends sweeping the Deposit Insurance and Credit Guarantee Corporation of India into its ambit.
While agreeing that the present system of deposit insurance is imperfect, Tarapore raises the concern that an umbrella resolution agency may end up footing the bill for a large variety of financial sector defaults. If the agency is not under the aegis of RBI, then who will fund its losses?
The book concludes with the ominous warning that, “Throughout the report, the Commission fails to appreciate the unique features of a central bank. With iconoclastic fervour, the Commission storms the gate of the Temple of Money. Predictably, in the internecine battle with RBI’s praetorian guards, rivers of Blood will flow. It must be remembered that countries that destroy their central banks destroy themselves.” Passionate statements of this nature slightly detract from the objectivity of this book.
Despite its pithy prose, one aspect of the book that makes it a little tedious to read is its repetitive element. Given that the volume is made up of articles on financial reforms, written at different points in time, mentions of some subjects, like the FSLRC’s attempts to downgrade RBI feature multiple times.
A lay reader may also wish that the book dwelt a little less on the Code’s impact on central banking operations, and a little more on its proposals that directly affect the common man. Tightening the consumer protection framework across financial products, laying down ground rules by which financial firms must function and setting out a participative process for rule-making are issues to which the Code devotes a great deal of attention. But these find limited mention in this book.
MEET THE AUTHOR
Savak Sohrab Tarapore is a career central banker who joined the RBI in 1961 as a Research Officer and retired as its Deputy Governor in 1996. During 1971-79 he was deputed to the IMF. He has chaired a number of influential committees. He was a member of the Banking Sector Reforms Committee in 1998.