For instance, even RR flagged unnecessary intervention in forex markets, the move of some regulation to SEBI and the required shift to inflation-targeting. Though not quite articulated in that fashion, RR also agrees with PM’s points that financial markets (banking, insurance, capital markets, asset management, derivatives) should not be artificially fragmented, segmented and compartmentalised. The UPA is close to its full term and has been unable to move on financial sector reforms (pensions, insurance, voting rights to foreign investors in banks). A quote from RR is in order: “Clearly, there is little urgency for reforms because India is not in a crisis. This is where the political leadership is of essence. Reforming in crisis is similar to driving with a gun to your head — you pay more attention, but there is much greater risk of accidents.”

The argument that with the Left out of the way, financial sector reforms will move is a non-starter. That’s certainly not the case where legislative changes are necessary. However, not everything requires changes in legislation. RBI’s exchange rate management (limits on external commercial borrowings, prevention of rupee appreciation) is one instance. The independent debt management office is another. It is true that North Block is reluctant to let go of RBI and exchange and interest rate policies have been influenced, if not determined, by the finance ministry.

However, independent debt management office is different, probably because this will be located in the finance ministry. But wherever it is located, this is a desirable move, since interest rates then become a true monetary policy instrument, and some upward pressure on interest rates is reduced. Fiscal deficits (though they hide several off-budget items) and FRBM targets are healthy enough for this transition to be possible. Before a full-fledged and independent debt management office, the intermediary proposal was of a middle-office in the finance ministry. Stated differently, North Block wanted this reform, even if it didn’t want others and RBI under Y.V. Reddy didn’t seem very keen. Earlier, under Bimal Jalan (1997-2003), the argument was that public debt management couldn’t be de-linked from monetary policy as long as deficits were high. Subject to the caveat mentioned, that’s no longer a valid argument.

... contd.