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Moving towards a consensus

The Planning Commission’s decision to set up a high-level committee to take a comprehensive look at financial sector reform is to be welcomed. The committee, under the chairmanship of Raghuram Rajan, has 12 members drawn from banks, the financial services industry, and the academic world. By March 2008, the committee is expected to set a detailed agenda for the sector, indicating the priorities and the sequencing of reform measures. It has been asked to suggest appro priate supervisory and regulatory changes as well as measures to contain risks. The terms of reference also require it to recommend whatever changes are found necessary in the legal and educational systems for enabling the financial sector to perform better. It was way back in 1998 that a similar comprehensive exercise was undertaken by Narasimham Committee and its report set the tone for what came to be called second generation reforms in the financial sector. Ten years on, there has been a rapid transformation of the financial sector. Reform of the sector has gone hand in hand with the opening up of the Indian economy. Today banks, insurance companies, and the capital market and its intermediaries are much better regulated and capitalised and are enabled to face competition from within the country and abroad. Consumers have a meaningful choice more than ever before. All these impressive achievements notwithstanding, some aspects of the reform especially those affecting ownership and the ceiling on foreign direct investment have become contentious and are unlikely to be implemented in the absence of a political consensus.

In fact, it is not for want of ideas that financial sector reform has suffered. It is highly unlikely that the proposals the Raghuram Rajan panel makes would be any easier to implement than some of the key recommendations of earlier committees. Nevertheless, the weight of its opinion on the reforms needed in key areas may help in developing a consensus. Many groups and organisations have addressed the various facets of reform. A few months ago, another committee that went into the question of developing Mumbai as an international financial centre made sweeping recommendations on financial sector reform too. Very recently, the RBI placed on its website a discussion paper on the structure of holding companies in banks. The capital market regulator, SEBI, has mooted a proposal for a fast track issuance of securities by eligible companies. However, the new committee can do a signal service by connecting the different strands and presenting a syncretic view of the reforms the Indian financial sector needs at this juncture.

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