UNIFIED FINANCIAL CODE: IS INDIA READY?
S S Tarapore
LexisNexis
166 pages; Rs 295
Ever since the Financial Sector Legislative Reforms Commission (FSLRC) report, the Indian Financial Code and the revised IFC Code were published by the government, there has been a debate on whether the suggestion of an entirely new set of laws for the financial sector is worth doing.
One of the most trenchant and well-informed critics has been S S Tarapore, who retired 19 years ago as a deputy governor of the Reserve Bank of India (RBI). Mr Tarapore's comprehension of the issues involved is deep and wide. He cannot be ignored by any sensible government.
"The leitmotif of the FSLRC report and the IFC Code...is premised on a morass of anger, confusion and hatred of the central bank...," says Mr Tarapore. "Such predilections should not be the basis of undertaking major financial legislative reforms... under the garb of reforms we should not destroy the Indian financial sector."
In another place he says the "FSLRC's assault on the RBI is shocking".
However, the context of this precise little collection of essays, which first appeared in the Hindu Business Line and as background papers to some conferences, also requires an explanation. It needs to be somewhat lengthy because it will hopefully place Mr Tarapore's views in proper perspective.
For the past 70 years US foreign policy has been driven by two major imperatives: gaining market access and non-proliferation. India had had to face immense pressure in this regard.
In fact, as early as 1948, the US had proposed what amounted to a free trade agreement, which India declined. It resisted the US steadfastly.
In 1990, thanks to Rajiv Gandhi's fiscal follies and V P Singh's policy paralysis, India almost defaulted on its external loans. Enter the International Monetary Fund (IMF), and policy reforms, which included opening up the Indian market to foreign producers.
The US, as the IMF's intellectual mentor and political boss, was very pleased. But there was a problem: its comparative advantage in the Ronald Reagan years had shifted from industry to finance.
So it started pressuring India to open its financial sector - banks, insurance, pension funds, equity market, debt market, the whole caboodle. India agreed but in a very foot-dragging sort of way.
Over the next two decades - which is the blink of the eye in Indian terms - it opened up its financial sector considerably. However, there was a problem: the RBI which oversaw the financial sector pointed out the difficulties in going faster.
After the Indo-US nuclear deal, the US became increasingly impatient. So the government set about putting the RBI in its place. This required, among other things, new laws for the financial sector. The old war between the government and the RBI acquired a new dimension.
It brought in some economists to make out a case and at least two committees made out a case for an overhaul of the legislative framework. Eventually, in 2013, the FSLRC report emerged and more recently the IFC Code. They laid out a route map for the way ahead.
Not everyone agreed with it, least of all Mr Tarapore who is a formidable defender of the faith. In these essays he picks the FSLRC's recommendations to the bone.
One of the most serious objections Mr Tarapore has is that the proposed changes would "distance the RBI from matters relating to financial stability and centralise all work relating to it with the central government".
This, he says, goes against the international experience since 2008 wherein governments have made their central banks more responsible and empowered them accordingly. Why should India do the opposite?
On the Public Debt Management Agency, Mr Tarapore alleges that the "FSLRC does not think it necessary to undertake fiscal consolidation as a necessary pre-requisite for an independent PDMA." His worry is that the government will bully the Agency into subverting the nature and purpose of Open Market Operations as a tool of monetary policy.
Yet another of his objections is about capital controls: "While the finance ministry will have virtually exclusive control over all capital inflows, the onus of managing outflows will be on the RBI." He is also quite incensed over what he calls "peremptory dismissal of the written dissent of three members".
The space available here is too little to deal with Mr Tarapore's anger in its entirety. Suffice it say that he needs to be taken very seriously.
One may, however, legitimately ask if Mr Tarapore is out of tune with the new set of imperatives and circumstances in which India finds itself.
