26 May 2016

Financial sector reforms: Move faster, sooner - Economic Times

I have a piece in today's Economic Times on the financial sector reforms in the two years of Modi rule and the way forward for the balance three years. Posted below is the full piece and here is the link to the original.

Financial sector reforms: Move faster, sooner

India’s financial sector and its regulators have much to be pleased about, though not enough to be complacent about. To start with, the RBI has always had a formidable reputation as a central banker. On the Sebi front, a World Bank ease of doing business study placed India at the 8th rank on investor protection. Incidentally, that was the only metric on which India performed in the top ten.
Archimedes said “give me a lever long enough and a fulcrum on which to place it, and I shall move the world”. The financial sector can be India’s lever and the regulators the fulcrum to improve the Indian economy by providing easier capital resulting in a Cambrian explosion of productivity and growth. The past two years have seen some significant changes in the financial regulatory structure.
The most dramatic of the changes, which will cast long shadows was the merger of the forward commodities futures regulator, with the securities regulator, Sebi. The merger has brought about significant improvements in the quality of regulation. The government should push for a more unified regulator with insurance, pension and even banking, falling under Sebi’s domain. This will prevent Sahara like problems arising out of regulatory gaps or turf fights like those seen between Sebi and the insurance regulator.
Significant reforms have been carried out in liberalising limits of foreign investments in areas such as insurance, defence, and railways. The FIPB is sought to be abolished.
The move would reduce pointless bureaucratic hurdles in foreign investments and unnecessary movement of files between three ministries and one or more financial regulators. More liberalisation in sectors would be key to further investments and draining the swamp of unnecessary procedure and multiple bodies should be the next important step.
The Jan Dhan Yojana has been a significant and impactful first step in financial inclusion. The objective to bank more people can be furthered with a removal of the requirement of ‘address proof’ which unnecessarily bars mobile citizens from opening bank accounts even though they have identity proofs. When I first moved to Ahmedabad to teach at IIM, I was unable to open a bank account for this reason. Imagine the plight of the uneducated and the poor.
The recent efforts to do away with tax havens and double nontax treaties is a tough step, which was long overdue and will end the apartheid against domestic investors. This should be carried to its logical conclusion and all investors, foreign or domestic should be treated fairly.
We need to improve the markets of corporate debt, securitisation, real estate trusts, infrastructure trusts for the development of India’s infrastructure. Similarly, developing the alternative investment fund market, currently pygmy-sized, would develop domestic investment of money which will go into productive use. Nearly 99% of the problems in all these areas relate to direct taxes or stamp duty.
The recent Narayana Murthy report constituted by Sebi hardly had any reform suggestions for the regulator — they were nearly all tax issues.
Finally, being able to raise capital is no good unless that capital is well deployed and the ease of doing business is improved with fewer permissions, forms and bureaucracy. That includes the modern ‘right to die’ for companies sought to be introduced by the new bankruptcy code.

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