Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The FSLRC report is seriously flawed - Outside View by S.S. TARAPORE

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The FSLRC report is seriously flawed
Nov 28, 2014

Is that surprising, given that it was caught in the clash between the UPA and the RBI?

The Prime Minister's Office has sought a status report on implementation of the Financial Sector Legislative Reforms Commission (FSLRC) report which was submitted in March 2013.

The need for revamping the legislative framework for the financial sector is undeniable but there are serious hazards in hasty implementation.

The major flaw is that the report is a by-product of open conflict between the erstwhile UPA government and regulators, particularly the Reserve Bank of India (RBI).

The leitmotif of the report is to scrap all existing financial sector legislation and subject the entire financial system to a single Indian Financial Code, ostensibly to provide for better governance and accountability.

In the process, the report sets out a single organisational structure which is then applied to all institutions. In the process the FSLRC centralises power in the Ministry of Finance.

The report and the financial code go against the fundamental theme of the NDA government of maximum governance with minimum government.

Rather than strengthening and rationalising the present regulatory framework, the report uses iconoclastic fervor to destroy time-tested systems by throwing out the baby with the bathwater.

The approach is "Delhi knows best", in contrast to Yashwant Sinha's statement that "Delhi knows nothing".

Monetary policy framework

The FSLRC report rightly points out that there should be a primary objective of monetary policy and only after this is attained could there be subsidiary objectives.

While recommending the setting up of a monetary policy committee (MPC), the report errs in recommending a seven-member MPC consisting of two RBI executives and five external members appointed by the government.

Moreover, a government official would be a non-voting member with a right to be heard.

It is too well known what happens when 'Big Brother' is watching. Since external members would be in the majority, accountability would be diluted.

The FSLRC provides for a veto for the governor which then reduces the MPC to the same status as the present Technical Advisory Committee on Monetary Policy.

If, instead, the Urjit Patel Committee recommendation is followed, there would be three RBI executives and two external members; this would put accountability squarely with the executives. Under such a model there should not be a veto for the governor.

It is essential that there is an agreement between the government and the RBI wherein the objectives are set out by the government and the RBI should have total independence in the deployment of the instruments. The agreement should be put in the public domain and any changes in it should, likewise, be in the public domain.

Public debt management

It is pertinent to recall that the need for an independent public debt management agency (PDMA) was first mooted in an RBI report by the Narasimham Advisory Group on Transparency of Monetary and Other Financial Policies in 2000 and it was stressed that a prerequisite would be fiscal consolidation.

The FSLRC does not think it necessary to undertake fiscal consolidation as a prerequisite for an independent PDMA. The FSLRC envisages that in the management of the PDMA, there would be a member from the RBI.

It is further specified that it would be incumbent on the chairman to ensure that the decisions of the PDMA are unanimous and if perchance there is dissent, the dissenting member would be required to make a written public statement. The FSLRC stance appears to sanctify bullying by Big Brother.

The purpose of an independent PDMA is to separate monetary policy from the government's debt management and this would require that the RBI's open market operations (OMO) are not a tool for ensuring that the government's borrowing programme is undertaken with indirect support from the RBI; such an arrangement would go against the spirit of the Fiscal Responsibility and Budget Management Act.

The OMO of the RBI should be essentially a monetary policy instrument and not a tool for ensuring that the government is able to borrow unlimited amounts at low rates of interest.

The FSLRC proposal would make monetary policy subservient to the PDMA.

Repayments sidestepped

The FSLRC sidesteps the issue of repayment of the government debt. The way the present system works, the government budgets for a net borrowing programme and it is assumed that the gross borrowing would ensure that the repayment would be made. In other words, the government borrowing is a Ponzi.

The Ministry of Finance, on September 30, 2014, set up a task force to work out the roadmap for setting up a PDMA and the work is to be completed in a year.

Since fiscal consolidation is not a prerequisite for setting up a PDMA it would be a sure way of inviting chaos in the management of public debt.

The other recommendations on a unified financial regulatory authority, the resolution corporation, the appellate tribunal and the redress agency need separate examination. ( to be continued )

Please Note: This article was first published in The Hindu Business Line on November 28, 2014.

This column, Maverick View 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 Freepress Journal, is titled Common Voice.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "The FSLRC report is seriously flawed". Click here!


More Views on News

Two Meetings That Nailed the Idea of Owning Brilliant Smallcaps Without Buying Them (The 5 Minute Wrapup)

Mar 22, 2018

Certain blue chips hold the potential of delivering returns comparable to small-cap stocks. With these stocks, you can get the best of both worlds.

What They Forgot to Tell You About Sensex at One Lakh (Profit Hunter)

Nov 29, 2017

Stocks that could beat Sensex returns in the long term.

Kotak Balanced Advantage Fund: Advantageous For Your Portfolio? (Outside View)

Jul 19, 2018

PersonalFN takes a look at Kotak Balanced Advantage Fund, a New Fund Offer (NFO) from Kotak Mahindra Mutual Fund.

How to Build Affordable Homes in India (Vivek Kaul's Diary)

Jul 19, 2018

Rajiv Talwar, the CEO of DLF, makes a few interesting points in a recent interview.

These Are the Best Stocks for the Next Decade (The 5 Minute Wrapup)

Jul 19, 2018

The start-up eco-system is disrupting each and every sector that we know of. How can Indian investors benefit from this?

More Views on News

Most Popular

How to Avoid a 90% Loss Suffered by This Super Investor(The 5 Minute Wrapup)

Jul 12, 2018

Blindly following super investors is a dangerous game to play. Here's how you can avoid such mistakes.

The Answer to Your Wealth Worries: Small Caps (Especially Now)(Profit Hunter)

Jul 10, 2018

If you're worried about the markets - you are on the wrong track. This is opportunity - put your wealth-building hat on, instead - Richa shows you how...

The Multiple Problems with the Minimum Support Price (MSP) System(Vivek Kaul's Diary)

Jul 11, 2018

The price signals that MSP sends out, creates its own set of problems.

New Fund Offer - ICICI Prudential Pharma Healthcare and Diagnostics Fund - Should You Invest?(Outside View)

Jul 6, 2018

ICICI AMC launches an open -ended equity fund following Pharma, Healthcare, Diagnostic and allied theme.

When Disappointment Panda is Around. Buy Quality Stock like This!(Chart Of The Day)

Jul 6, 2018

Buy Companies that can fight all kinds of Pandas and Bears in the long run.


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Jul 19, 2018 (Close)