Let's get moving

Financial sector liberalisation and monetary management have been the unlikely subjects of fierce debate in the past few months. As the currencies of the world have swung in different directions and inflation has come along with a slowing economic tempo, the different ways of dealing with complex macro-economic issues have spawned debates of rare, almost ideological intensity. The report of the Raghuram Rajan committee has come out in such an atmosphere, and it is therefore a given that some of its recommendations on the big issues will be hotly contested all over again. The whole issue of whether the monetary authority should focus on a single goal (inflation control "" as the Rajan report recommends), or have a broader mix of objectives, will not find a consensus for a while yet. Simply put, the "policy establishment" doesn't like the idea while many economists who argue for wholesale change think that such a change is long overdue.

Some of the other seeds tossed out by the committee (selling the smaller, state-owned banks, for instance) will hit stony ground; it is hard to see the kind of government that will take on this challenge, however much it may need doing. It is easy to understand why an undeterred Rajan committee has gone into these issues and made its recommendations, because the report would have been hopelessly incomplete without them, but it is also easy to see that if action is taken at all on the lines suggested, it will be after a considerable passage of time. Equally, some of the new regulatory structures suggested in the report are unlikely to find ready acceptance ""the traditionalists will see in them the danger of eating into the autonomy and authority of the Reserve Bank. The committee's logic is that informal consultation already takes place between the regulators of different facets of the financial world, and it is best to have this formalised "" an argument that has some merit, so long as the primacy of the RBI is preserved.

It would be a huge pity, however, if the much longer list of issues that are part of financial liberalisation were to be held indefinitely hostage by the more contentious issues, and indeed if the economy as a whole were to be held hostage by the lack of financial sector liberalisation. It is, after all, quite hard to defend a banking system that gives the country real interest rates that are among the highest in the world. From that perspective, there is much to be recommended in the Rajan report, and indeed a good deal of it is entirely non-contentious (who will argue against sorting out land records?). Therefore, as Dr Rajan himself has suggested, it would be more productive to focus on these less contentious issues and try and get some quick action going. Here is an "immediate action" list: allow more local agents to extend financial services on behalf of banks; create a market for priority sector lending on the lines of the carbon trading system (those who do less have to buy certificates from those who do more); make the annual cost of a loan to a borrower fully transparent; create stronger boards for large state-owned banks; free up branch licensing and the location policy for ATMs; allow holding company structures; create a financial ombudsman; have more asset reconstruction companies. This list can go on, but the point should be clear.