Build­ing a New House of Fi­nance a Test for FM

The Economic Times - - Markets - SHAJI VIKRA­MAN

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.

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