The Government of India has finally made the mistake we had sincerely hoped it would not. It has notified the constitution of the Financial Stability and Development Council (FSDC). The institutional concession made to the Reserve Bank of India (RBI), with its governor being named chairperson of a sub-committee on financial stability, is more an act of appeasement than recantation. This newspaper took a considered view from day one that the idea of the FSDC, first proposed by Union Finance Minister Pranab Mukherjee in his Budget speech this year, was a bad one. This is in no way a comment on the minister himself. Mr Mukherjee is without doubt a wise and experienced politician. He has long years of experience in the Union government. He has been India’s finance minister in another era and has returned to provide leadership to the ministry in a new world. While his intentions would be honourable and motivations unquestionable, it appears his thinking is outdated. Mr Mukherjee is using the policy framework of his earlier tenure at North Block to shape his thinking in the present one. Both the world and India have moved on since the 1980s. While it is true that the central bank is a creation of the government and the governor of RBI is its appointee, while it is also true that the finance minister is answerable to Parliament on behalf of the central bank, the fact remains that the central bank has acquired a new profile in the modern world that has enabled governments to manage both markets and financial institutions better. The authority of the central bank governor, created in part by new methodologies of policy communication and the use of monetary policy and other policy variables, has helped in improved and more professional management of the economy. The world has come to respect India for the way in which its macroeconomic authorities steered the economy, especially the financial sector, in the months preceding the trans-Atlantic financial crisis. There was no FSDC then. There was just a credible RBI.
As former RBI Governor Bimal Jalan wrote in his column in this newspaper (BS, August 28, 2010), acknowledging that a sagacious finance minister like Mr Mukherjee is unlikely to misuse the institution, once an instrument of interference gets created, someone less experienced and mature could misuse it and this could result in undue political interference in regulatory and policy actions of the central bank and other financial sector regulators. The argument that the US has a similar institution in the Financial Stability Oversight Council (FSOC) is neither here nor there. In any case, the US is hardly a good example to follow these days as far as financial sector regulation is concerned. No parliamentary democracy has such an institution that enables political interference in financial sector regulation. If the idea of the finance ministry was merely to ensure better coordination between various regulators, this could have been ensured in a variety of ways without creating formal structures. It is a pity, therefore, that the government has ignored our cautionary words. The future will tell whether we are being overly concerned.
