Political experimentation with Financial Stability?

Finance Ministers, as clichés go, perform “balancing acts”, “tight rope walk” and “juggle” with numbers.  Pranab Mukherjee and his team – the annual numbers exercise, the budget having been done with  --  are now playing magicians. Here’s the rabbit they have pulled out of nothing. FSDC: Financial Stability Development Council.

Good name, for sure. The council is about financial stability. Just that it has sent alarm bells ringing in Mumbai, home to the country’s central bank. RBI Governor D Subbarao has gone on record about “delineating the specific roles and functions of the FSDC vis-à-vis the existing framework".

The proposed council may, as reports say, have Finance Minister as ex officio chairperson. Which have sparked off apprehension that the council may give the executive/political leadership direct, hands-on leverage over the financial system. It need be asked: what prompted Finance Minister Pranab Mukherjee to announce the setting up of this council?


The rationale for the FSDC, as Finance Minister Pranab Mukherjee enunciated in his budget speech is that the global financial crisis of 2008-09 has “fundamentally changed”  the structure of banking and financial markets “the world over.” With a view to “to strengthen and institutionalise”  “the mechanism” for maintaining financial stability in the country, he announced that an “apex level” Financial Stability and Development Council would be set up. The proposed entity will “monitor” macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues.”

Finance Minister hasn’t quite been able to make out a case for the proposed council.

Firstly, Mukherjee has, so to say, pulled the rabbit out of virtually nothing. India’s financial sector emerged largely unscathed from the financial crisis. This, it need be emphasized, came about thanks to the fact that Reserve Bank India – with whatever limited autonomy it is able to exercise – had already adopted a cautious approach as regards capital flows. (The monitoring of financial conglomerates though requires to be addressed, which we will revert to.)

Secondly, to cite “fundamental” changes in banking and financial markets “the world over” as rationale for the proposed FSDC is bizarre to say the least. In the wake of the global crisis, in the UK for instance, there are moves afoot to restore the supervisory powers to the Bank of England. The issue is not fundamental change per se, but the direction of change. Even if new global thinking is what is inspiring the Indian Finance Ministry, it seems to be moving in the opposite direction. For, the FSDC’s mandate clearly overlaps with the existing role of the central bank and other autonomous regulators.

Thirdly, reiteration that the proposed council is not a “super regulator” isn’t convincing enough.  The Financial Stability Council, envisaged as an “apex level” body, reportedly to be headed by Finance Minister, armed with an overarching mandate and backed by full time secretariat is obviously envisaged as powerful institution that will have the central bank and other regulators as members. Mukherjee’s public affirmation that the FSDC will function “without prejudice to the autonomy of regulators” hasn’t quite removed public apprehension.

The new entity’s mandate clearly provides it supervisory powers over what is presently the domain of RBI, other regulators and more. The FSDC, it seems, will act as a referee of sorts on conflicts among regulators, which, are quite often company specific. It may, in practice, have leverage over mutual funds, insurance companies as also multi-sector companies if one of the sectors they operate in is in the financial domain.

Finance Ministry officials have – perhaps naively? Or mischievously? -- argued:  since the Government hasn’t even decided on whether the FSDC should be a statutory body, there’s no basis for apprehensions that it will subsume the role of other statutory regulators. Really? As real politics goes (and matters financial are political as well!) ideas are floated, and depending upon the reaction fine tuned. If the idea of such a council finds acceptance, surely it can, over time be institutionalized through a statute as well. Moreover, don’t we all know that even as things stand, it is the Government that calls the shots in the appointment of regulators, some of who, in any case, are looking for plums post retirement! Do we really expect them to exercise their “autonomy” against the decisions of the FM headed council ?

It’s really about  Accountability v/s Autonomy. It’s about balancing these twin, objectives while pursuing growth in an increasingly complex financial system.

Should the role of the final arbiter in the financial system be institutionally assigned to the executive/political leadership ? The universally accepted wisdom that monitoring of financial systems should not be the domain of the executive/political leadership has sound basis. In democracies, political leadership – which has the compulsions of raising funds for elections -- is vulnerable  to pressures from huge financial conglomerates.

In this context, speeches by Prime Minister Manmohan Singh – who headed RBI in the eighties – and Finance Minister Pranab Mukherjee offer an insight into government’s thinking.  Mukherjee, while reiterating the need to strengthen the central bank as an institution, said this ought to be done “with an appropriate balance of autonomy and accountability in the context of a modern democracy. Our aim is to move towards establishing a modern, financial and monetary system in India with appropriately strengthened and autonomous regulators and the central bank”.

Prime Minister Manmohan Singh endorsed  “caution in the pace of opening capital account”, a “constant feature of our policy”, as worth continuing with and rightly underscored the need to develop the banking and financial system to support higher rates of growth that the country is aiming it. No one can quarrel with that.

However, what is interesting is that Dr Singh also endorsed “experimentation”. He said: "I sometimes hear that our insulation has served us well and we should therefore avoid experimentation and further liberalisation in this (financial sector). This, I fear, would be a wrong lesson to learn from the crisis."

What then are the lessons learnt from the crises?

Well, “crisis-crisis” – a favourite and believe you, a serious game played out in think tanks taking a peep into the future – does not lead to action on non-existing crisis! Nor can such an exercise – useful though it is – provide “lessons” contrary to established facts! There is no rationale for “fundamental change” in India when the country’s  built in institutional safety mechanisms have stood the test of global crisis. In fact, even elsewhere there is reversion back to the primacy of the central bank and insulating financial system from direct intervention by the executive.

The FM chaired FSDC ostensibly seeks to “strengthen”, “the mechanism” – presently there is the RBI chaired High Level Financial Co-Ordination Committee (HLCC) on financial markets comprising various regulators. Going by the details on FSDC available thus far in the public domain, it will clearly subsume the existing mechanism. The dangers of a political leadership taking on direct interventionist, supervisory powers are all too obvious.

There certainly is a case for monitoring huge financial conglomerates – activities of some of whom range from financial sector to many other diverse sectors. Such conglomerates – more powerful conglomerates will emerge -- escape the regulator’s eyes. There is need for monitoring. Sure. Just that handing this role to the executive is not the answer. In fact, on the contrary, it calls for further strengthening of the regulators.

Surely, in a democracy political leadership is accountable to the people but as surely it alone cannot be the sole equivalence of accountability.  Ministers – have hardly ever been held  “accountable” for the losses caused to the exchequer by their acts of indiscretion. Mature democracies need multiple layers of accountability.  The notion being advanced – that elected political leadership should be the final arbiter in the hugely complex financial system – is in fact retrogressive.

Is the National Development Council a model worth looking at in the context of managing financial stability? Perhaps yes. The Financial Stability Council could be just be a council that gives counsel. No direct day to day “monitoring” the “monitors” or supervision of financial conglomerates.

The government proposes to shortly put out a position paper on FSDC in public domain. So, to come back to where we began. Would the magician transform the rabbit into something else? Or simply make it vanish into thin air?  




(This  was published in Sahara magazine in the first week of April, 2010)