All in the preconditions

FSLRC recommendations ignore the Indian context

The recommendations of the Financial Sector Legislative Reforms Commission (FSLRC), which submitted its final report at the end of March, have provoked a substantial amount of public comment. The pros and cons of specific recommendations have been laid out, all of which will help the government in shaping the legislative agenda in the months to come. Scepticism has also been expressed about the ambitious scale of the proposals and the enormous challenge that legislating all of them will pose. That, of course, is the government's lookout and should not, in any case, have restrained the FSLRC as it went about its business. However, another point of criticism deserves greater attention. The proposals have been described as too "theoretical", valid perhaps in some ideal set of circumstances, but not having paid enough attention to the ground realities of the Indian institutional and governance structures.

Of course, commissions with sweeping mandates have often been emboldened to make recommendations that appear to be dramatic departures from the legacy. Often, however, partial and piecemeal implementation by the government, for whatever reason, has resulted in the outcome being far from what was visualised when making the recommendations. A striking instance is the Fifth Pay Commission's daring proposal in the mid-1990s to increase compensation to government employees by 30 per cent, while simultaneously reducing employment levels by the same proportion in a phased manner. The first part was gleefully accepted but the second was shelved, with the entire load being borne by natural attrition rather than a strategic and calibrated reduction as visualised by the Commission.

Similar concerns could legitimately be raised about many of the FSLRC's proposals. This newspaper has commented editorially on the basic principles underlying the proposals - in support of them, but also cautioning about establishing the conditions in which some of them would work. As the proposals and the dissenting notes are subject to greater scrutiny, this process will continue. One important recommendation whose effective functioning is critically dependent on creating the right governance structure is the transition to a monetary policy committee, which would decide on policy actions by a majority vote. Many countries have created such a structure and so this is consistent with international practice. On the face of it, formal and explicit distribution of accountability for decisions over a group has many benefits; collective decision making is generally viewed as reducing the probability of error. But take one step back and the questions start to come up. The government is to be given the predominant power to constitute the committee. Are there appointment processes that can ensure that the best talent is brought on board? How can it be ensured that members vote on the merits of the situation and not because of implicit or explicit signals from the people who appointed them? If these questions are not credibly addressed, a framework that is intended to increase the independence of monetary policy decisions could well be perceived as an instrument of government leverage, undermining the very purpose of the recommendation. Of course, this is but one example. More generally, the public debate would be far more constructive if attention was paid to the preconditions required to make each of the major proposals work effectively.