Reforming the financial sector

A discussion document

Comments on the Financial Sector Legislative Reforms Commission’s Recommendations

V Anantha Nageswaran, Co-founder and Fellow for Geoeconomics

Summary
Appointed by the Government of India in 2011, the Financial Sector Legislative Reforms Commission (FSLRC) submitted its report in March.

Had this Commission completed its work before 2008, it might have stood a better chance of being taken seriously for its assumptions were valid in a world dominated by finance, before the crisis seriously undermined them. The pro-cyclical nature of financial markets and credit creation necessitates tight regulation of the sector.

The Commission’s failure to understand that has led it to recommend trimming the powers of Indian financial sector regulators, especially the Reserve Bank of India. That is as dangerous as it is flawed. Furthermore, the Commission has reversed the trend towards greater regulatory autonomy and competence by vesting the government with more powers over the sector. Given the government’s record of wanton disregard for fiscal probity, financial repression and its lack of talent, these recommendations are regressive and bode ill for India.

Therefore, the government that takes office in 2014 after the general elections must appoint another Commission to propose a more reasonable set of proposals for legislative reforms and the strengthening of regulations and regulators in the financial sector.

Download the discussion document in PDF format (130 KB).