A UPA government not dependent on Left support can best be described as a dream come true and is a best-case scenario for investors in general. The markets gave a thumbs-up to the victory obviously in the hope of reforms being pushed aggressively, especially in the financial sector. Also, unlike earlier, the new government cannot offer any excuses for not delivering on the key issues facing the nation.
While talking of reforms, we cannot ignore the fact that there have emerged two very opposing and contradictory views – one favouring reforms and the other blaming the same for the crisis we faced in the recent past. UPA Chairperson Sonia Gandhi, taking credit for the limited impact that the global financial crisis has had on the Indian economy, at the Hindustan Times Summit in New Delhi, claimed that it was due to the wisdom of Prime Minister Indira Gandhi’s decision to nationalize banks.
Financial reforms in the form of financial liberalization have been the root cause of financial and banking crises leading to currency crisis in several countries, so much so that many of them had to re-impose the controls or intervene directly. It has therefore been proved that, without understanding the ground realities of our system, no reform can be implemented simply because it appears sound theoretically or has proved effective elsewhere.
The reforms have been blamed because they put an end to our “splendid isolation” and integrated us more with the world, leading to our experiencing the tremors of the global financial crisis. It is against this backdrop that the current government has to give serious thought to two basic questions, pertaining to the why and what of reforms.
Though the return of the UPA assures continuity and consistency of policies, the same may not be seen in view of the largesse the earlier government granted to various sections for potential political gain. Having achieved the purpose, some harsh measures need to be taken urgently to bring the economy back on track and fight the slowdown aggressively. Fiscal discipline should therefore be the core of whatever shape the reforms are to take.
The recent past has witnessed the economy paying heavily for the excessive volatility in exchange rates emanating from huge and sudden inflows and outflows of capital from abroad. The financial system needs to address this vital problem, viewing the rupee convertibility in this perspective. At the same time, the financial system needs to be made more responsive to the needs of the unorganized sectors especially small and medium enterprises with special emphasis on micro financing to achieve inclusive growth. Instead of being stock market-centric, our policies should aim at achieving the robustness of industry and the corporate sector. This will automatically take care of the stock markets.
The virtual non-existence of debt market is the major weakness of our financial system that needs to be addressed urgently. It will go a long way in assisting infrastructure financing. Infrastructure needs big fiscal incentives, failing which it will be a major bottleneck in achieving the long-term growth target of 9-10 per cent. Prime Minister Manmohan Singh has himself pointed out that the twin problems of poverty and unemployment cannot be tackled seriously unless we achieve a growth rate of at least 9-10 per cent.
Bank mergers and disinvestments in PSUs are commonly rated to be very high priority items on the agenda of reforms. However, any hasty decision on both these counts may backfire. The government needs to tread very cautiously. The experience abroad suggests that banks of very large size keep the native governments under pressure to unwillingly subsidize them in order to avoid any major crisis spilling over to the financial system. Any move towards disinvestment should wait till the markets stabilize and are prepared to absorb the floatation of the size these companies intend to place. Any rush on this count may do irreparable damage to the markets and investor sentiment in general.
The regulatory structure in the country is another area that needs urgent attention. We need a single regulator for all financial activities in the country. Multiple agencies harm market regulation. A regulator as weak and inefficient as SEBI needs to be completely overhauled. The endless wait for the new Companies Act should also now end. And the Competition Commission of India (CCI) needs to be activated immediately with far more powers than it enjoys.
Increased fiscal decentralization, simplification of rules and regulations for doing business, and reforms in pension and provident funds to avert any major crisis are tasks that need to be taken up at the earliest. Therefore, making the financial system vibrant enough to not only encourage people to save more but also attract increased amount of their savings to productive financial assets is the biggest challenge this government faces.
Instead of being stock market-centric, our policies should aim at achieving the robustness of industry and the corporate sector. This will automatically take care of the stock markets
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
