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Home > Blogs > Ian Fraser > India's commitment to financial reform hangs in the balance

India's commitment to financial reform hangs in the balance

India's Economy: Financial Reforms hang in the balance Ian Fraser

To liberalize finance? Or not to liberalize finance? That is the question. And it is one that is dividing India’s policy-making elite.

Industrial conglomerates including India’s second largest company, Reliance group, and the Mumbai-based carmaker Mahindra & Mahindra are eager to branch out into financial services. They and other proponents of liberalization argue that letting a thousand banks bloom would inject a much needed dose of competition into the country's dusty banking sector, encouraging the existing players to become more dynamic, productive and efficient, and therefore boosting economic growth. Proponents of reform also argue it would bolster capital flows and help tackle "financial exclusion".

However there are plenty of others who are less convinced of the need for liberalization. They include the country's central bank the Reserve Bank of India, which fears that allowing multiplicity of new financial entrants might pose a risk to stability (and will also impose scary new supervisory burdens). They also argue that, given that tight control of the financial sector played a key part in enabling the Asia’s third largest economy to ride of the economic storms of recent years, it makes no sense to liberalize now.

Speaking at a recent conference organised by Yes Bank and the Financial Times, Montek Singh Ahluwalia,  a professional economist who runs India's economic planning agency, questioned such talk and made a strong case for allowing new entrants in – both from overseas banks, and offshoots of industrial conglomerates.

Ahluwalia warned delegates at the event in Mumbai’s Trident Hotel that any failure to open up the Indian finance sector would hold back the Indian economy, undermining attempts to reverse a recent fall in output. He also said it would make it very difficult for India to meet its target of increasing economic growth to 9% by 2017. The turbaned technocrat was quoted in the FT’s Beyond Brics blog as saying:

“It is a mistake to think that it was because we are tightly regulated, and because the whole world is now tightening, that we must be wary of liberalization. As India integrates increasingly with the rest of the world, as we will… the real lesson is that we were right to liberalize gradually, and we should continue to liberalize gradually…”

The FT's Mumbai correspondent James Crabtree reported that Ahluwalia’s call for finance sector liberalization came as a second push on economic reforms, designed to complement those launched in recent months, is awaited from a Delhi government which, under new finance minister Palaniappan Chidambaram, “seems to have rediscovered some of its reforming mojo”.

Ahluwalia said he wants the government to allow greater foreign direct investment in India’s insurance and pensions sectors, but conceded that getting such legislation through the country’s fractious parliament could prove difficult.

The long promised measures have been in the doldrums since they were last mooted in the middle of last year, Crabtree reported, partly because of stalled legislation, but also because of lack of enthusiasm from the Reserve Bank of India, which was described as particularly dubious about allowing industrial conglomerates to enter the banking space.

In an op-ed in the Wall Street Journal’s ‘Live Mint', Tamal managing editor Tamal Bandyopadhyay, took issue with the naysayers and suggested India needs a system in which any reasonably qualified and well-run business is permitted to found a bank. The RBI issued its first guidelines on the entry of new private banks in 1993 and, in the first licence round, it awarded banking licences to ten out of 113 applicants. Four of those have since failed.

Further reading on Indian banking, finance and FDI




Tags: Beyond Brics , currency liberalization , FDI , financial exclusion , Financial Times , Foreign Direct Investment , India , Indian economy , James Crabtree , Mahindra and Mahindra , Montek Singh Ahluwalia , Mumbai , Palaniappan Chidambaram , Reliance , Reserve Bank of India , Tamal Bandyopadhyay , Yes Bank
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