When the global financial crisis hit most economies in 2008,India escaped unscathed,thanks to Dr YV Reddy who headed the RBI between 2003 and 2008. In an interview to George Mathew,Reddy talks about various issues from tax treaties,speculative flows,microfinance companies and legislative reforms in the financial sector. Excerpts: On tax treaties and their impact on regulation That can undermine the regulation in general. More important I was arguing is that if tax co-ordination is not there when cross-border banks,they operate in two jurisdictions. It will be able to move money,between two countries or regulators. So you have problems. We are having problems. Much of our overseas investments come from Mauritius and now Singapore. Some of the companies open the branch in . say Singapore,so that they dont get tax. Its exactly the same activity and everything is same. They just create a company to avoid a tax. Its not a question of misuse or anything. If theres a tax agreement and you take advantage,you cant call it misuse. But it undermines your capacity to regulate. On rise in asset prices (like stocks,gold real estate),Tobin tax and speculative flows The issue is global liquidity. Many other countries are having similar problems. Most of the countries have several measures,including increase in interest rates,capital controls,Tobin tax . Japan is intervening in the forex market. Different countries are adopting different policies. The RBI Governor has indicated that is nothing is ruled out. Govt is keeping all its options open. Now the issue is whether we should be more active. Analytically,Im making two points. Tobin Tax should be an option. Many countries should consider irrespective of an international agreement. Even if an agreement is not there,countries should be prepared to do that. Then financial sector taxation should be viewed as a whole. The UK has decided to go for financial sector taxation. Many countries are considering it. So you should not rule it out especially when theres excess of financial transactions. The RBI has indicated that India can absorb 3 per cent of the GDP,which is the level of the current account deficit . whichs around $40-50 billion. I think its reasonable. The world is going through high uncertainties and volatilities. In India we are having current account deficit and fiscal deficit. Therefore we should be careful. We should take precautionary measures so that we are not vulnerable and concentrate on growth factors. On housing market reforms,financial sector-real sector link I mentioned about the housing market as an illustration in the book. I said the real sector is more important. When you want to improve housing,land prices should be better,the transaction tax should be less. You should be able to buy and sell the house. You go and take a loan to buy a house but the tenant doesnt go. The bank gives you a loan and its stuck. How can the financial sector function? The financial sector functions effectively if real sector flexibilities are there. I tried to illustrate the link between the financial sector and real sector. On microfinance companies,moneylenders and banks role For-profit MFIs should be treated like moneylenders. Banks give money to for-profit MFIs and not-for-profit MFIs. Its not the same. It has to be treated differently. More than one year ago I flagged it as a problem. Its an issue. Banks can show MFI funding as priority sector lending. MFIs should profit. The people did they benefit or suffer? This is the question for which I am looking for an answer now. Just because it suits some people does not mean its good for all people. Moneylenders are large. Almost half of the lending goes through moneylenders. Why it took 50-60 years for the banking system to replace moneylenders? Its better to see how to bring the informal sector closer to the formal sector by making it semi-formal. To do that,we should have a proper moneylenders legislation. Bring informal lenders into the fold and try to regulate them. For-profit MFIs should be treated like moneylenders. My view is that any regulation of moneylending including for-profit MFIs is done the best at the state level. On the proposed Commission for Legislative Reforms in the financial sector My point is simple. The minister has made an announcement. Im not questioning that. It is also necessary for the commission to see what are the legislations which are already proposed and which are before the Parliament. What happened to them? Its not a technical issue,its a legislative issue. There are many legislations already. why they are passed and why they are not being passed? What was their intent? Should there be new legislations? Secondly,there are other laws. For example,the tenancy laws. It has nothing to do with finance. But if the tenancy law is unrealistic,then it affects the financial sector. On strengthening the high-level committee on capital markets rather than setting up FSDC (Financial Stability and Development Council). It was working. The main point that I mentioned when the minister made the announcement is that it should not give the impression that the central bank is being undermined and the co-ordinating role of the central bank is not being taken care of. Its not so much of what you should do but what people think you do. Thats important.
