ma Kapila, the editor of this book, has brought out more than 20 volumes during the last two decades, most of them on economic reforms. Most are edited by her and include articles published or speeches, lectures, etc. delivered earlier. Curiously, they are mostly by senior officials associated with reforms in the Reserve Bank of India (RBI) or the Government of India.
This militates against the subtext of the book: “priorities and policies-post global financial crisis.” Experts drawn from outside are better placed to make independent evaluations than those involved with the process. The most scintillating contribution (chapter 8) is by Prof. Joseph Stiglitz, Nobel Laureate, who raises doubts about the past monetary policies and narrates the lessons learnt from the crisis. He enunciates 14 lessons for monetary policy emanating from the onset of the crisis. Broadly, the crisis established that self-regulation does not work. In particular, it destroys the credibility of the “efficient market hypothesis” (EMH) which was deemed sacrosanct by neocon theorists. He explains how a market with asymmetric information cannot be competitive and would be characterised by credit rationing and unemployment. He feels that past “Monetary policy has not served our economies and societies well.” In sum, Stiglitz calls for a total reassessment of earlier policies, especially those espoused in the name of free market and deregulation.
Dr. Y.V. Reddy (chapter 7) describes the “policy capture” by the financial class and how the crisis compels attention to the need to ensure that the financial sector serves society better. To bring this about, financial policy needs to be integrated with national economic policies and be seen more as a means than as an end in itself. He cautions against excessive financialisation and pleads for the maintenance of a proper balance between the financial and the real sectors.
Dr. Rangarajan echoes (chapter 4) these concerns, especially those voiced by Stiglitz on issues like new bank products (innovations!) which increase the short-term profitability of banks more than enhancing financial stability. He refers to the lack of global consensus on the right size of financial markets (assets) vis-à-vis GDP.
The crisis has exposed the inadequacies of earlier theories. It has thrown open the differences between the U.S. and the EU — and even within the EU — on bank regulation and bailout policies. There is no longer any faith in the efficacy of monetary policy tools.
Tested against these developments, it is difficult to say that India witnesses any new wind blowing across its reform path, especially in the financial sector. Apart from the first flush of reforms undertaken earlier such as deregulation of interest, reduction in SLR/CRR, adoption of Basel II norms and strengthening of banks’ balance sheets, there have been no major reforms despite the hype over Second Generation Reforms. PSBs continue to dominate. The capital market has not been deepened and bond markets remain weak. The RBI’s stability reports suggest that banks are under stress with the burden of loans extended to power, telecom, and other sectors. There are no resources to finance large value infrastructure projects.
The impasse on financial reforms is in part due to political compulsions. More importantly, it is due to external or macro-economic developments. Except on the regulatory side where the RBI withstood the pressures and thereby saved the country from successive global crises, the monetary policy of the RBI has remained passive or reactive to external developments. There was complacency during the years 2003-08 when there was global ballooning of credit and India was one of the beneficiaries of the loose credit policies of the US Fed and ECB. In those happy days, the RBI could operate its multiple-objectives of maintaining inflation, exchange and interest rates. The Liquidity corridor worked smoothly. But once the capital flows crossed permissible thresholds or began to flow back, the system came under strain. Adding to the RBI’s misery are fiscal and current account deficits. Recent years have witnessed an undeclared war between the RBI and North Block on issues like growth versus inflation.
It is surprising that all the authors, other than those summarised in the introductory part, do not deal with any of the issues relating to reforms or their progress or lack of progress. This is because they are functionaries who are unable to see the big picture and view some of the micro issues through departmental prisms. There are five or six chapters which examine whether price stability is a valid objective vis-à-vis financial stability. In fact, this is a tame issue and inflation expectation or targets have been buried deep.
The RBI Governor Subbarao (chapter 10) raises what he terms “policy challenges from the New Trilemma.” He has often emphasised the need for the RBI and the government to share responsibility, especially in relation to the impact of fiscal deficits and to ensure fiscal stability. He feels that unless the respective roles are defined, these could impact adversely the independence and accountability of the RBI. The situation could get worse if debt market operations are shifted from the RBI to the Finance Ministry. It is a retrograde step and puts the clock back.
There are obsessive concerns over issues like “financial inclusion” and adoption of Basel-III norms. These are not reform issues in any sense. Financial inclusion has no meaning unless most of our citizens get employment, earn good incomes and are able to save. Without increasing levels of prosperity, financial inclusion may remain a slogan. Basel-III is a wasteful exercise especially since our banks are owned and underwritten by the government. Even the U.S. has been resisting adoption of these norms and delaying the process.
There is one chapter (15) on “G-20 and India” by Governor Subbarao. It is difficult to share the optimism shown by him on the role of G-20. G-20 was a ploy engaged by the U.S. at a time when they needed cooperation from the larger emerging economies. After 2009 and with the crisis abating somewhat, G-20 has lost its primacy.
To conclude, this book does not deal with post-crisis financial reforms or priorities. It is a mixed bag and contains a couple of brilliant chapters along with pedestrian contributions. There is no serious attempt to detail the nature of financial reforms or why reforms have not gone far.
( K. Subramanian is a retired civil servant )