Building a New House of Finance a Test for FM
Towards the fag-end of the UPA gover nment’s term, finance minister P Chidambaram left a critical decision to be taken on the approach to institutional and legislative changes in the financial sector to his successor. India’s new FM and government will have to decide whether or not they want to rock the boat and change the institutional structure which will see a whittling of regulators and a redressal mechanism for consumers and financial investors besides a resolution agency like in the West for distressed firms. Chidambaram told his officers before his departure that he believed that a new government would support what he considered to be a forward approach to the financial sector. The BJP hasn’t indicated its mind on this. The finance ministry had started work on some building blocks including capacity-building for the sector as well as on a new Financial Sector Appellate Authority. The new FM will have to decide whether the pension, insurance and commodities market regulators should be subsumed into a single authority. That decision will also influence whether the Forward Markets Commission should be empowered. The new gover nment may not quite warm up to the changes in the near-term given the imperative of a fiscal consolidation and the need to put growth back on track.
But it cannot dither in its approach to fighting inflation. The RBI and the UPA government have held talks on whether the central bank should transit towards a monetary policy approach with inflation-targeting at its core. The BJP-led government will have to decide whether the RBI should be a pure inflation-targeting central bank and the composition of the committee. Re-establishing a healthy working relationship with the central bank whose governor is a major advocate of financial reforms will be another test. But one thing is for sure. The BJP has stated its intention to apply the broom to the banking sector. The huge pile of bad loans and the need for capital aggregating close to ` 2.5 lakh crore by 2018 for PSU banks will mean an overhaul of the way in which these lenders are managed out of Delhi. The party has promised operational freedom to banks even while nudging them to raise capital from investors. The blueprint for carrying out those changes has been laid down in the report of a committee headed by former civil servant and chairman of Axis Bank, PJ Nayak. The next few months will be a test of whether the new government has the political will to either shutter banks which are a drag on the system or sell them off. The party is yet to warm up to licences for industrial or corporate groups. The challenge will be in working on liquid financial markets. Former RBI governor Bimal Jalan reckons that in the first round, there is no need to hasten these reforms but rather ensure that fiscal and monetary policies are in tandem. The test will be on political will as this gover nment has something which even the Narasimha Rao government that had implemented landmark reforms, lacked — numbers.