Percy S Mistry: Confusion worse confounded?

The answer to the question as to where the Indian financial system is headed is elusive

Whither Indian financial reform? An answer to that question remains elusive. After a decade, debate about reform has revived with the Tarapore-2 and M-IFC Reports. But it is bizarre and personal. A visiting Martian would think that it involves only dichotomies; i.e. between: (a) going fast vs. going slow; (b) pitting the careful/conservative vs. the brash, aggressive, over-ambitious; (c) impugning "young", inexperienced, critics vs. eulogising practitioners wedded to past paradigms; (d) old heterodoxies, apparently durable vs. new orthodoxies, allegedly crumbling; (e) Big Bangs vs. small splutters, neither understood; (f) a fiscally incontinent GoI vs. a blameless RBI burdened with cleaning up everyone else's mess; (g) impossible trinities vs. monetary magicians who reconcile the irreconcilable through sleight-of -control; (h) institutional infallibility vs. the all-too-fallible who argue that regulators may have no intellectual clothes on "" if they did, they would not be arguing the way they are; or (j) theoretical market-fundos vs. experienced control-commandos. And so on.

These dichotomies define the contours of our "debate". Arguments shift to false ground when no case can be made by institutions protecting their turf and resisting loss of power. Sacrificing power to accommodate wider interests is sacrilege. So, arguments about reform degenerate into low-intensity guerrilla warfare conducted by proxies. Hyperbole, adjectives, and unsubtly veiled insults become weapons of choice. Constructive engagement over the future of Indian finance is foregone. It cedes to arguments aimed at perpetuating the strangulated past. Worst of all, focusing on false dichotomies obscures questions that matter. For starters:

First, can the exploding financial needs of an economy like India's be met by its current financial system? Obviously NOT. The system is too ill-structured, poorly governed, market-deficient, institutionally weak, state-owned, and micro-managed by regulators. No effort has been made to understand how/why our financial system has come to this pass. Why is it so dysfunctional? What should be done about it, strategically, tactically and priority-wise? These questions deserve a treatise which cannot be written here. But you get my drift.

Second, can free and open global markets in goods, services, factors, commodities, work and self-correct, if the currencies in which they are priced are determined in markets that are NOT free, open or efficient? Again the answer is NO. Why then try to justify the unjustifiable? Why not make our currency markets as free, open and efficient as our "real" markets? Is it because everyone else is not doing that to our disadvantage? Is the fact that China is damaging the world economy, by not letting the CNY rise against the USD as rapidly as it should so that essential global adjustment can take place, sufficient reason for us to be equally otiose?

Third, can we make our currency markets free, open and efficient without full convertibility? Again the answer is obvious; so the debate shifts to false ground about the dangers of doing so.

Are the Tarapore prerequisites for CAC binding and sacrosanct? Probably not. They deserve consideration for the risks they pose. But are these insurmountable? Clearly, state-owned banks (SOBs) are weak links in our financial system. In their hands derivatives might become weapons of mass financial destruction. But we have let that risk grow for 40 years. Should we avoid CAC and let it keep growing? Should we penalise capable banks by not letting key markets (currencies and interest rate derivatives) evolve because of weak SOBs? Or should we let these markets develop and prohibit SOBs from using them? Similarly, our fiscal deficit and vain efforts to hide its true size are of concern. But is it an insuperable obstacle to CAC? Will delaying CAC for these 'concomitants' make us better or worse off? Or will CAC help resolve these problems faster by concentrating our minds?

Fourth, when SOBs are our weakest link "" because they are inefficient, under-managed, over-staffed, over-unionised, customer-unfriendly, and techno-phobic "" should we be considering a Rs 10,000 crore public capital infusion for SBI? To be followed by another Rs 10,000-15,000 crore for the other SOBs, in order to maintain a public share-holding of over 51%? Is that wise use of scarce public resources with our fiscal deficit and other priorities for poverty reduction? Do SOBs serve the public interest, or the interests of the poor (in whose name they were nationalised)? Or do they serve limited interests; i.e. those of their managers, staff, bureaucrats, and politicians (sorely lacking in ethical, moral and intellectual fibre)? Are we so pusillanimous about political opposition that we cannot ask ourselves this question? Why do we not debate this openly rather than perpetuating the cancer that debilitates our financial system?

Fifth, we need to improve the functioning of our sovereign and corporate bond markets. Why then are we debating whether the RBI should cede its G-Sec trading platform to the BSE/NSE? Does it make sense for the RBI to remain in the business of running the market in G-Secs? Why should we delay progress in a necessary direction to address institutionally self-interested concerns? Why do we restrict open foreign investor and market-making participation in our bond markets?

In a similar vein, we can ask Question Six: Why is a cack-handed approach being taken to introducing currency and interest futures (we are not talking options yet) with the RBI insisting that it should be the sole regulator of trading in such instruments? Common sense and global practice dictate that should be left to the capital market, rather than the banking regulator. And so we can go to Question 100 or more. But space in this column does not permit that. Hopefully the reader has grasped by now that we need to stop scorpion-dancing around false dichotomies. We must debate serious questions that really matter in making progress with financial reforms. We cannot permit institutional self-interest "" whether that of MoF, RBI, SEBI or any institution "" determine what the agenda of reform and the focus of debate should be. A free market in ideas is as essential as a free economy or free financial markets. So let's debate questions and ideas that matter, instead of discrediting motives or impugning personalities of those who disagree with us, and are perceived as threatening the current institutional imbalance-of-power.