Vision of hope for the financial sector
V. S. SAMBANDAN
A HUNDRED SMALL STEPS — Report of the Committee on Financial Sector Reforms: Sage Publications India Pvt. Ltd., B 1/I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi-110044. Rs. 795.
There are some advantages, so to say, of remaining a low flyer. To start with, when the global economy goes on a downward spiral, the relatively lower levels of exposure act as a natural insulator against immediate shocks. But such approaches are fatalistic. If India is destined to play a major role in the world’s polity, it has to get its economy onto a higher growth orbit. For this, the country’s financial sector needs to be shipshape.
“First, there is so much yet to be done,” says this report constituted by the Planning Commission, Government of India. This is a truism not only for the country’s banking sector, but also in various socio-economic segments of the nation as well.
Popularly known as the Raghuram Rajan Committee, the report is the latest addition to several landmark documents that have set visions of hope for India to live up to its potential. The report calls for a “new paradigm in the financial sector.” For instance, the potential to inject over $300 billion of agricultural credit lies in an example of the metaphoric hundred small steps: trading warehouse receipts. This, the Committee argues, “is the kind of reform the country can easily achieve.” For instance, if warehouse receipts were made negotiable instruments [with the expected passing of the Warehousing (Development and Regulation) Act, 2008], they would become “a new, reliable form of collateral in the agricultural sector, where until now there was no other security except land.”
Range of reforms
The report dwells on aspects of the Indian economy where the reforms can go deep, and perhaps could be less controversial. For instance, few can differ on the importance of addressing problems relating to financial exclusion. The chapter “Broadening Access to Finance”, which deals with the important issue of financial inclusion, is an example of a much-required, but less controversial area of reform. The report brings together interesting and relevant data on the subjects it covers. For instance, the chapter on financial inclusion, which gives details of the link between annual income and bank accounts by occupation group, shows that while 95 per cent of businessmen have an account, it is a low 14 per cent for agricultural wage labourers. The eight chapters cover the range of reforms that are required in the financial services. These also include the need to level the playing field, creating more efficient and liquid markets, the need for a growth-friendly regulatory framework, creating a robust infrastructure for credit, and special topics such as infrastructure financing, old-age pensions, and improving data collection. The report also joins the calls made for a national ID as part of its strategy to create robust infrastructure for credit. “A unique ID establishes a person’s identity in a decisive manner and is a critical element of any functional credit infrastructure for financial inclusion.” Interestingly it goes into some detail about the ID card system prevailing in other countries, and says “perhaps the best in the region is the national identification system hosted by the Government of Pakistan.” This uses “the medium of a smart card, storing photo and fingerprint information; it is broadly and universally used; it operates with a support of a very robust back-end electronic database and relies on the network of specially designated local offices.” A tabulation of the seven key identification systems available in India and the opportunities for scaling gives a snapshot of the improvements possible.
The three important reasons for financial sector reforms highlighted by the report are inclusiveness, growth, and stability. This adds to the existing body of knowledge on the state of play of the nation’s economy in a very important sector, and its 28 proposals would help in creating a better and more inclusive financial system, which will enable India to rise to higher levels of sustained economic growth.
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