People's Democracy

RAGHURAM RAJAN COMMITTEE'S REPORT

'A Hundred Small Steps' To  Financial Sector Ruin

K V George

THE logic behind the proposal for 'A hundred small steps' by Raghuram Rajan  High Power Committee on the so-called next generation financial sector reforms is misleading and perhaps deceptive. The panel, which  submitted its report to the Planning Commission recently,  recognises that certain issues like capital account convertibility, bank privatisation and priority sector lending norms are 'important but controversial'.  So, instead of focusing primarily on a few large, unusually politically controversial measures the committee stresses, �We need to take a hundred small steps in the same direction that will collectively take us very far�. These small steps, it believes, can be initiated easily and without much fanfare and opposition. Thus the strategy is very clear: Creating abundant pressure and compulsion through a hundred small steps to start with, so as to ensure that reversal from the reform track at a later stage becomes virtually impractical and impossible. Naturally, the title of the first chapter of Raghuram Rajan Committee's report is titled 'A Hundred Small Steps' and which constitutes the executive summary of the report.

It is pertinent to note that Raghuram Rajan became famous for being the first Asian to be appointed as the chief economist of the International Monetary Fund (IMF). He later returned to Chicago's Graduate School of Business where he was teaching earlier. The Planning Commission gave him the mandate of working out a 'roadmap for financial sector reforms' in India in 2007. He was also in news recently for openly attacking the UPA government's loan waiver scheme for farmers terming it �a disaster which spoils the credit culture in the country�!

With such impeccable noe-liberal credentials, the ex-IMF man has naturally chosen his committee members from among the known proponents of the neo-liberal economic and banking policies. There is not a single trade union representative in the twelve member committee. Leave alone the Left, nobody from among those who maintain a different view was empanelled. Not a single economist or academician who is likely to dissent was taken. The committee report is exparte and totally undemocratic.

In Defence

of Markets

Unfortunately for the committee, the report had to be presented at a time when the global financial capital finds itself in deep turmoil, and casino banking bubbles have started bursting. The panel recognises this situation when it records, �This is, however, a difficult time to propose financial sector reforms in India. The near meltdown of the US financial sector seems to be proof that markets and competition do not work�. However the committee maintains, that it is wrong to draw such a conclusion. The right lesson is that markets and institutions succumb occasionally to excesses and in the US the regulators clearly failed this time.

Likewise, the report states that the primary lesson from the Asian crisis is not that foreign capital or financial markets are destabilising. It is the poor governance, poor risk management, asset  liability mismatches and inadequate disclosure which have to be blamed for this debacle.  

RBI Criticised

In the wake of incessant capital flows into the country, RBI has taken steps to sterilise the dollar because of fear of further rupee appreciation and the resultant excess liquidity leading to hike in inflation. However  the committee disapproves RBI's role and wants RBI to restrain from the 'futile exercise'. The committee bluntly holds that capital controls are ineffective beyond the short term. Given how open and competitive has India become, the committee is sure that it will be impossible to control capital flows in either direction, in the long run. In fact, Chapter II on Macro Economic Frame work unleashes scathing attack on RBI primarily on this count.

According to the committee, the Flls are flocking to India to partake in the 'India Growth Story'. The inflow is inevitable as the fundamentals are strong and the economy is posting a stellar performance. Without hesitation, it also admits that as soon as the situation is reversed, thanks to domestic or global circumstances, the opposite will happen, whereby outflow will begin. Still the committee has absolutely no reservation in recommending an open door policy that will subject the economy to the vagaries of free ingress and exgress philosophy.

It is in this context that the committee pursues the need for 'managing integration of the domestic financial system into the global economy'. It is stated that the gains are considerable but 'penalties for mistakes can also be large and harsh'. The panel lists many potential benefits like innovative and sophisticated instruments, more depth for the financial markets, more competitive and efficient domestic banking system from opening up to foreign banks and FIIs. This has been done by ruling out two often repeated preconditions in the academic literature - reaching a certain threshold level of maturity; and appropriate regulatory expertise on grounds that capital flows are not new for India.

Despite misgivings, the committee argues for allowing foreign ownership or foreign banks to enter India, either through branches or subsidiaries. This is on the plea that it would bring in collateral benefits such as competition, efficiency and skills leading to a �cross fertilisation� of talents.

The committee refers to two research findings: (1) Kose, Prasad, Rogoff and Wei (KPRW) 2006 and (2) Prasad, Rajan and Subramanian (PRS)  2007, suggesting that it is not difficult to find persuasive evidence to the effect that financial integration boosts growth. Umpteen study reports are available to prove cherry picking and cream skimming by foreign banks in their eagerness to reap higher profits. This part of the report, on the whole looks like a feeble and fragile bail application.

Delinking of

Government

Chapter IV on 'Level Playing Field' is a convenient plea to push through the doctrine of ownership neutrality and delink public sector banks from the government. The committee lists three distinct privileges enjoyed by the Indian PSBs thus:

1. Extensive branch network helping to marshall substantial amount of low cost deposits adding to the spread and profitability of PSBs.

2. The easy access to government business, and business from various instruments of the government.

3. The advantages of the public sector banner in recovery of overdues and NPAs.

Since these privileges are not available to the foreign and private banks, they are deprived of a level playing field. This constitutes injustice and imbalance and hence must not go on. It is to remove this so-called imbalance that the committee advocates disinvestment of shares. The committee appears to be feeling that advancing an attractive appeal like this may reduce opposition against privatisation. Bank employees and the people of this country can easily distinguish the imminent lethal threat, sought to be concealed in the fresh, sweet reasoning.

Financial

Inclusion

In Chapter III titled 'Broad Access to Finance', the committee advances yet another fantastic definition for financial inclusion. It observes that financial inclusion is not only about credit but covers a stream of financial services like savings bank accounts, crop and health insurance, remittance products and self financing pension schemes which in course of time enables the excluded segments to avail credit!

Arjun Sen Gupta Committee has just recently found that 83.6 crore Indians live on Rs 20 a day and branded them as �poor and vulnerable�. Maybe, it is for these 'poor and vulnerable' segments that Rajan committee recommends savings bank accounts, health, crop insurance and self financing pension schemes, instead of credit. The absurd argument being given is that credit will lead them to debt trap and inefficient allocation of scarce resources.

About priority sector lending undertaken by PSBs, the committee has little or no regard. It says, because the PSBs adopted profit motive, they have also started cherry picking. The rural branches of PSBs, the RRBs and the co-operative banks have the following so-called deficiencies:

1. Urban recruited staff coming by bus in the morning and going by bus in the evening do not know the pulse of the rural folk.

2. They await for orders from controlling offices for next step.

3. Ceiling on ROI militates against commercial viability.

4. RRB staff gets pay package of commercial bank employees and hence the system becomes unviable.

5. Co-operative banks are good but they are in deep financial crisis and political interference eats into their vitals.

To overcome all these hurdles, the committee proposes Small Finance Banks (SFB) which have the following four characteristic features:

1. Local: Not waiting for instructions from controlling offices; decisions are quick.

2. Small: Confined to the locality. Owner himself is the employee.

3. Private: Always keeps viability in mind. No documentation and cumbersome procedure.

4. Voluntary: Policies are flexible. No restrictions in scale of finance. No working hours. No ceiling on ROI

In short, the committee seeks to equate local money lender to a micro lender, christened as SFB and legalise their illegal, irregular acts and levying of prohibitive rates and charges. This amounts to justification and glorification of the exploitative local money lending business.

Gambling

Justified

Chapter V titled, 'Creating More Efficient and Liquid Markets' reiterates the committee's concentrated and cold blooded obsession with market fundamentalism. The committee is well aware of the explosive situation in the forex and commodity derivative markets, world over, whereupon top ranking investors like Warren Buffet described them as Financial Weapons of Mass Destruction and Inter Continental Ballistic Missiles. The Committee therefore, discusses the matter at length by asking a few questions such as, �Are markets casinoes ?, �Are markets and futures simply legalised gambling?�, �Are grain markets manipulated?�  etc�etc. But it concludes that market is the solution and without market there is no solution. Throughout chapter V, there are utterances like: �Markets have a view of future outcomes�,  �Price fluctuations in financial markets does not mean economic instability�, �Flexibility in financial prices induce stability in the economy�  etc.

In one paragraph, the committee indicates about the speculative character of the derivatives. �It is true that a number of investors are risk seekers much like gamblers and there is certain amount of luck in  who makes money�. But the report warns against government intervention, for, if government attempts to restrict price movements, it will lead to a bigger fall and capital flight.

The committee also feels that high future grain prices give farmers an incentive to invest. It is indeed strange that at a time when, sub prime crises wiped out family wealth upto $ 4 to 6 trillion in the US, top rated credit insurers got downgraded, a large bank got bankrupt, corporate bond defaults forced losses and bankruptcy and economists of the stature of  Nouriel Roubini estimated the losses  at $3 trillion, the Rajan panel still would like to sing the chorus, �markets will bring in efficiency, innovation and profitability�.

Intolerance

Lastly, about unions in banks, the report contains certain remarks in chapter IV:  �Unions can be a very positive force in employer - employee relations�

Then it is added :

�To the extent, however, that PSB unions can use their proximity to political power have an added influence over the management of some PSBs (an influence that would be weaker in private sector banks), it creates an imbalance that can be detrimental to the banks as a whole� .

These comments contain everything.

The trade unions in banking industry have been able to wage many a battle against the forerunners of Raghuram Rajan. The unions will rise to the occasion and play their due role in  fighting out the evil designs of the Chicago professor too.