Not by Law Alone

This newspaper’s interview with the chairman of the newly-appointed Financial Sector Legislative Reforms Commission, Justice Srikrishna (ET, March 28) serves to highlight a vital question: can financial law be rewritten even as financial policy is still being formulated? The Raghuram Rajan committee, the report on making Mumbai an international financial centre, etc, have accumulated, only to spawn yet more reports even as more than half of India’s populace remains outside the framework of formal finance and India’s financial sector remains stunted by global standards. A Jalan Committee has come up with an archaic vision of natural monopoly in stock exchanges, the government has pushed through legislation that makes the finance minister the chairman of an overarching regulatory body. Loan waivers play havoc with credit discipline even as politicians make that a tool to promote their own chosen brand of microfinance. And since India was relatively insulated from the global financial sector meltdown , many in authority believe that India has little to learn from the rest of the world when it comes to financial regulation.

A more plausible alternate explanation for India’s relative immunity from the global mess would compare the global financial sector crisis to an adult disease and India’s financial sector to a repressed child, capable only of infantile disorders. This being the state of the financial sector, the urgent need is to chalk out a clear strategy for financial sector development with, one, institutions that promote competition , inclusion and fair play, two, regulation that clearly allocates responsibility for effective macroprudential and microprudential behaviour, three, openness to deployment of technology as it evolves, four, financial innovation subject to prudent regulation, and, five, calibrated integration with global flows. Once such a strategy and its detailed policy implications have been worked out, then a committee can usefully get to work clothing the policy in coherent laws. Till then, should the good justice rush down the trail in the dust left by the government dragging its feet over a series of financial sector reports?