Last week, the finance ministry decided at the last moment to exclude clauses from the Finance Bill that related to the establishment of a public debt management agency and the removal of government securities from the Reserve Bank of India (RBI)'s regulatory jurisdiction. These had led to a rather acrimonious exchange between the ministry and the central bank in the wake of the presentation of the Union Budget. This round has evidently gone to the RBI. However, the contest is undoubtedly not over and the ministry will seek to recover the face that it has lost very quickly. As reported in this newspaper, many observers see this coming by way of the monetary policy committee, in which the ministry could assume a dominant role in making appointments. Be that as it may, this entire episode raises some questions about both the prospects of financial sector reforms and the relationship between the ministry and the RBI, which provides the backdrop against which these reforms will be carried out.
The finance minister's statement in Parliament explaining the exclusion does point out that the idea of separating the debt management function was, in fact, proposed by the RBI itself in 2000-01. Why it has taken so long, not to mention a number of expert committee recommendations, to get to this point itself is a legitimate question. It is no surprise that the RBI, even though the idea may have originated there, was consistently opposed to the move. Part of this may have been protection of turf. Arguments were also made about capabilities, on the one hand, and the day-to-day connections to the market that the debt management function gives to the central bank. The ostensible reason for the ministry's decision to postpone the action is that it is concerned with the lack of capability outside the RBI to carry out this responsibility immediately. Surely, though, this judgement could have been made before the idea was introduced into the Bill. There are also genuine questions to be asked about whether this should have been tagged onto a Money Bill like the Budget, denying the Rajya Sabha its right to vote on the change in law. The retraction, thus, reflects badly on the government's internal process of lawmaking.
The larger question, though, is where this leaves the financial sector reform blueprint. Articulated in the form of the Indian Financial Code, the blueprint is both ambitious in scope and also pragmatic in implementing the envisaged reforms. This allows progress on several fronts even while the grand plan is marketed to regulators and parliamentarians. In fact, the ministry has set up, among others, a task force to set up the very public debt management authority that it has now deferred legislation on. However, even as this process has been in motion, the RBI has been consistently pushing back on proposals in the blueprint. Whatever the merits of each side's position may be, this is not a very effective way to implement a complicated reform agenda. The success of the entire initiative will ultimately depend on the buy-in and commitment of all the major stakeholders, and the RBI is certainly one. But ad hoc concessions to it are not going to address the issue either. In the light of these recent confrontations, financial sector reforms would be best served by a joint process, which transparently delineates areas of agreement and disagreement and then moves quickly on the former.
