Eco Survey calls for shift from entity-based to activity-based regulation

Regulators must walk the tightrope to balance growth with stability

As India’s financial system is supervised by domain-specific regulators, and increasing innovation is blurring these boundaries, regulation should shift from entity-based to activity-based frameworks, focusing on the risk and function of transactions rather than institutional labels, the Economic Survey said.

 

The report further said that in today’s era, India’s financial sector regulators must walk a tightrope to balance growth with stability. They must strike a balance between openness to global capital flows and the need to insulate the domestic economy from volatile external shocks, it said.

 

The Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority (PFRDA), and International Financial Services Centres Authority are the regulators of different financial sectors of the country.

 

 

While observing that India has historically placed a premium on banking system stability, the report said banks remain dominant, despite not being adequately equipped to finance infrastructure, energy transition, and large manufacturing projects with long horizons.

 

“India’s development aspirations require a diversified ecosystem where well-managed banks compete alongside NBFCs, fintechs, and market-based lenders. Diversification distributes risk and builds resilience, lessening vulnerability to shocks,” it said.

 

The report said a diversified financial ecosystem calls for regulatory coordination, as India’s financial system is currently supervised by domain-specific regulators.

 

“Financial innovation increasingly blurs these boundaries. Banks distribute insurance and mutual funds; NBFCs perform functions similar to those of banks; fintechs intermediate credit and payments,” it said.

 

To avoid regulatory arbitrage, inconsistency, and enforcement blind spots, regulation should shift from entity-based to activity-based frameworks, it said.

 

When entities engage in similar activities, they should face proportionate regulatory oversight based on their risk exposure, which promotes equality of treatment, competition, and innovation, while ensuring systemic stability.

 

“Finally, enhanced inter-agency coordination is crucial for effective oversight of increasingly complex and interconnected financial entities.”

 

The report also called for regulators to strike a balance between openness to global capital flows and the need to insulate the domestic economy from volatile external shocks.

 

Moreover, given India’s heterogeneous financial landscape, where sophisticated metropolitan markets coexist alongside underserved rural segments, regulators must exercise differentiated supervision, the report said, suggesting a shorter leash for emerging or fragile segments prone to excessive risk-taking and greater latitude for mature markets.

 

“So far, India’s financial sector regulators have managed the balancing act deftly,” the survey added.