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Financial legislative reforms hit a raw nerve - Outside View by S.S. TARAPORE
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Financial legislative reforms hit a raw nerve
Aug 10, 2015

The Financial Sector Legislative Reforms Commission (FSLRC) completed its work, as scheduled, by March 2013 with Volume I the Main Report and Volume II the Draft Indian Financial Code (IFC).With four dissents and three members being unable to participate, Justice B.N.Srikrishna cobbled together some sort of majority report. Public attention was initially on the main report and only later to the IFC. The government set up a number of task forces to carry the work forward.

A noticeable feature was that while the UPA government strongly supported the report and the proposed legislative changes, the present NDA government also showed a strong inclination to pursue with the proposals. The Commission's report undeniably contains a large number of invaluable recommendations. But in over-enthusiasm, the report recommended certain legislative changes which are unrealistic from the viewpoint of practical policy as also jurisprudence.

Developments in July 2015

On July 23, 2015, the government released for comments, by August 8, 2015, a revised Draft Code, and there was an upsurge of adverse comments as the proposed legislative reforms hit a raw nerve.

Monetary Policy Committee (MPC)

The revised code made a major change in the composition of the MPC. Under the FSLRC proposal, the RBI was to have two executives on the MPC while there would be five external members and there was provision for a veto power for the Governor.

The Urjit Patel Committee of the RBI recommended an MPC of three RBI executives and two external members without a veto for the Governor.

The revised code provides for three RBI members and four external members appointed by the government and there would be no veto for the Governor. In addition, there was provision for a non-voting government nominee, with an important stipulation that the government representative must prepare a written statement, approved by the Central Government, to be presented at the MPC meeting. Furthermore, under the revised code, the External members would enjoy the rank and facilities equivalent to that of the RBI Board member on the MPC, which translates to the rank of Deputy Governor. Thus, in effect, there would be five persons with the rank of Deputy Governor dealing with monetary policy-a classic case of showering sinecure to the privileged persons chosen by government. With Big Brother presenting a written statement, brave would be the external member of the MPC who would not toe the line of the government representative. For an independently functioning MPC, the external members would need to be former Governors- Narasimham, Rangarajan, Jalan, Reddy and Subbarao. Given the government's proclivity to back-seat driving, they would never appoint such giants as external members! To add insult to injury, the FSLRC and its avatars, in terms of the IFC and the Revised IFC, strip the 'Governor' of his distinguished position and call him 'Chairman'. This confirms that the whole exercise is mala fide.

Dr. Rangarajan, in a pithy statement, said that if external members are in a majority, the Governor must have a veto power but if the RBI executives are in a majority, there should not be a veto. Governor Raghuram Rajan has clarified that committee decisions are superior to a single person's decision and as such he was comfortable without a veto. The top policymakers on the government side, as also the Governor, have said that they are on the same page and that there is an agreed decision which would be set out to Parliament. This reduces the revised IFC to mere hot air. Ministry of Finance sources have indicated that the MPC would be composed of equal representation of RBI and government nominated external members (three each) with a casting vote for the Governor. It is intended to approach Cabinet to seek Parliamentary approval to amend the RBI Act.

The back-off by government

As part of damage containment, the Minister of State for Finance, Mr. Jayant Sinha, said that the Revised IFC was only a discussion paper and initially the onus of the revision was put on the FSLRC. The Chairman of the FSLRC, Justice B.N.Srikrishna, has now clarified that the government had, in writing, indicated what changes the government wanted and that he and some others were only asked to check the legal aspects of the changes. Thus, neither the government nor the FSLRC is willing to accept parentage of the Revised IFC.

It is unseemly for the government to now say that the 'people of India own this draft'. Such palming off is disrespectful of the people of India. The government has the right to seek advice from anyone but the government has to accept responsibility for what it puts out as a revised code. The government should cut its losses and simply bury the FSLRC and the two codes.

Need for clarity on abrogation of existing Acts

It is time to give up the cloak and dagger approach of smuggling in abrogation of existing laws. The government must come up with a transparent commitment on abrogation of each individual Act and the implications thereon.

The Indian body politic is just not willing to give up majority government ownership in the public sector banks. In this context, how can the government say that the 'people of India' want to abrogate the Acts relating to public sector banks? The only honourable way out is for the government to undertake a volte face on the IFC and its revised avatar, however embarrassing it may be for the government. Allowing external protagonists to undertake a 'legislative capture' without accountability would be dangerous. It would be best to take the existing legislation as a base and then to undertake a purposeful strengthening of these Acts. The iconoclastic approach of the protagonists should not be allowed to hold sway.

Please Note: This article was first published in The Freepress Journal on August 10, 2015. Syndicated.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


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