RBI governor Raghuram Rajan cautions against 'Appellate Raj' in financial regulation

KOLKATA: Reserve Bank of India governor Raghuram Rajan said the political discourse in the country is moving in the direction with administration steering away from 'giving hand outs to creating jobs.' But the planned reforms must focus on creating capacities to provide a strong government instead of creating `layers’ that become obstacles.

"Let me emphasize, we need 'checks and balance', but we should ensure a balance of checks. We cannot have escaped from the License Permit Raj only to end up in the Appellate Raj!," Rajan said while speaking on democracy, inclusion and prosperity at the DD Kosambi Ideas Festival held on February 20, 2015 in Goa.

Although Rajan did not make any direct reference, but his remarks on “creating layers” is seen as a veiled criticism of the proposal of creating a single appellate authority for all financial sector watchdogs, including RBI, put forward by India’s Financial Sector Legislative Reforms Commission (FSLRC).

He had expressed his disapproval against excessive oversight last year too, saying that excessive layers could reduce regulators to paper tigers.

"In thinking through reforms, we may want to move from the theoretical ideal of how a system might work in a country with enormous administrative capacity, to how it would work in the actual Indian situation," Rajan said in Goa.

The governor, making a reference to political scientist Francis Fukuyama’s analysis of the emergence of political systems, said that countries would have to strengthen government and regulatory capabilities to remove barriers and to push development.

Liberal democracies, which seem to be best at fostering political freedoms and economic success, tend to have three important pillars: a strong government, rule of law, and democratic accountability.

The strongest in India is democratic accountability, said Rajan. India also adheres broadly to the rule of law. He said that India might have a long way to go, as Fukuyama has emphasized, is in the capacity of the government to deliver governance and public services.

Going beyond Fukuyama’s doctrine, Rajan also argued the importance of free markets as a fourth pillar for making liberal democracy prosper. "I will warn that these pillars are weakening in industrial countries because of rising inequality of opportunity."

Rajan said a vibrant accountable democracy does not only imply that people cast their vote freely every five years. It requires the full mix of a raucous investigative press, public debate uninhibited by political correctness, many political parties representing varied constituencies, and a variety of non-governmental organizations organizing and representing interests.