Reforms can't be shots in dark: Rajan

The pace of economic reforms in India must be steady and firm, even as the country's financial system needs better competition and efficiency in a bid to secure the nation from external and internal risks, Reserve Bank of India Governor Raghuram Rajan said on Thursday.

"A regulatory view, fashionable in the past, was that the pace of regulatory reforms had to be limited by the capacity of our banks, especially our public sector banks," Rajan wrote in the governor's overview of the central bank's annual report for 2014-15.

"The current stress in the banking system suggests that the real economy will not wait for the banking system, and a slow pace of reform could lead to greater, rather than lower risk residing in the banking system. Financial sector reforms need to move on many fronts," he said.

"For a country as big and populous as India, reforms cannot be shots in the dark, subjecting the economy to great uncertainty and risk. Wherever possible, we have to move steadily but firmly, ever expanding the scope of reforms while always limiting the uncertainty they create."

The central bank governor said the Chinese phrase - "Crossing the river by feeling the stones" - was an appropriate metaphor to guide India's own reforms, with the financial sector in partiular needing better efficiency through greater entry and competition.

"The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments wherever possible, especially those that are biased towards some form of ownership or some particular institutional form."

He said the financial system needed to increase its size, depth, and liquidity.

"Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement and protection for market participants against abusive practices."

At the same time, he added, technology could be very helpful in reducing the costs of supportive frameworks, and bring the excluded populations into the financial fold. "It is these ideas that guide our medium-term reform strategy."

As for the central bank, the governor said it was an efficient organisation that had steadily cut reduced its employee count from 35,500 in 1981 to 16,700 now while performing an ever-increasing workload. He said it also created a Rs.659-billion surplus that has been paid to the exchequer.