Financial sector reforms: A status report

by Ashish Aggarwal.

A broad consensus on India's financial sector reforms has come together in the past decade, through a series of expert committee reports: Percy Mistry's report emphasising international financial services (2007), Raghuram Rajan's report emphasising domestic finance (2009), U. K. Sinha's report on capital controls (2010) and Dhirendra Swarup's report on consumer protection (2009, released 2014). These led up to Justice Srikrishna's Financial Sector Legislative Reforms Commission (2013), which has given version 1.1 of the Indian Financial Code in 2015.

In this article, we locate the new information that has unfolded in the Budget packet, for 2016, in the context of the larger journey of financial sector reforms.

Monetary Policy Law

The Finance Bill, 2016, embeds a block of well drafted law which will amend the RBI Act. This carries the work of monetary policy reform forward after the Monetary Policy Framework Agreement of February 2015. It establishes CPI inflation as the objective of RBI, and shifts power on rate setting from the government and the governor to a `Monetary Policy Committee'.

There has been a lot of focus on the composition of the MPC. The quick summary of this journey is:

Differences in the constitution of the MPC
Particulars	Members appointed by RBI	External members appointed by Central Government	Members appointed by Central Government, in consultation with RBI	Governor veto
IFC 1.0	2	3	2	Yes
IFC 1.1	3	4	0	No
Finance Bill 2016	3	3	0	No

The Finance Bill, 2016 requires the Central Government to appoint the external members as per the recommendations of a Search and Selection Committee which will comprise of the Cabinet Secretary, Secretary (DEA), the RBI Governor and three experts in the field of economics, banking, monetary policy or finance, to be nominated by the Central Government.

PDMA and the bond market

The last year budget had proposed setting up a PDMA which will bring both India’s external borrowings and domestic debt under one roof. However, the proposal was later withdrawn. The implementation document about Budget 2015 merely states that while the Government is committed to setting up the PDMA, it is in the process of preparing a detailed roadmap separating the debt management functions from the RBI in consultation with RBI.

This leaves us in the status quo of difficulties in debt management for the government and the lack of a government bond market, and the lack of a corporate bond market. The Budget 2016 has some small actions which are supposed to constitute corporate bond market development, but they are not connected with the main project of financial sector reforms, and will not matter.

Financial Redress Agency

Budget 2015 had proposed to create a Task Force to establish a sector-neutral Financial Redress Agency that will address grievances against all financial service providers. The budget-implementation document merely states that the Task Force was set up on June 5, 2015.

Capital Controls

Last year's Finance Bill amended Section-6 of FEMA to clearly provide that control on capital flows as equity will be exercised by the Government, in consultation with the RBI. The implementation document merely notes that the process of consulting Reserve Bank on Debt and Non-debt instruments classifications is on.

Specialised Resolution Regime

The Budget Speech proposes the tabling of a comprehensive law establishing a specialised resolution regime for banks and financial institutions during 2016-17. This Code will provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015 (now referred to a JPC in December 2015), will provide a comprehensive resolution mechanism.

This is a welcome move. However, the Government must hit the road running in building the Resolution Corporation so that when the law gets enacted, the resolution machinery actually works as it is intended to.

Financial Data Management Centre (FDMC)

The Budget Speech proposes setting up a FDMC under the aegis of the Financial Stability Development Council (FSDC) to facilitate integrated data aggregation and analysis in the financial sector. Details about how this will be done are awaited.

The FSLRC's vision for this Data Centre was to provide for a nation-wide integrated repository of information relating to the financial sector, which can be used to study systemic indicators in the economy and further research in this field. As a nerve-centre for regulatory data cutting across various segments of the financial sector, the importance of this centre cannot be underestimated. This, and the obligation on regulators to share the information with the Data Centre, underscore the importance of a statutory instrument to make the Data Centre work.

Merger of SEBI-FMC

One of the important proposals made by the FSLRC was to constitute a unified regulator for financial products and financial services, except for the purposes of banking. As a step towards integration, the FMC was merged into SEBI under the Finance Act, 2015. The merger was effected in September 2015 and SEBI now regulates the commodities and the securities markets. Budget 2016 said that new commodity derivatives products would come about this year, as a consequence of this merger last year.

Building other agencies envisaged by FSLRC

In 2014-15, the Government had constituted four task forces for building the institutions envisaged under the Indian Financial Code. This could easily be classified as a first attempt of its kind by the Central Government to build institutional capacity of this scale in India.

The Task Forces submitted their recommendations in June 2015. The budget-implementation document states that the Central Government is in the process of considering the recommendations made by the Task Forces.

Indian Financial Code

In June 2015, the Ministry of Finance released for public comments a version of the Indian Financial Code (IFC1.1) which was refined and revised on the basis of public feedback received from March 2013 onwards. The implementation document states that the Government has consolidated the comments received during Public Consultation in July-August 2015 and the government is in process of responding to public comments, and is assessing the preparatory work involved to gauge a realistic target for introducing IFC1.1 in Parliament.



The author is a researcher at the National Institute for Public Finance and Policy.