If you can effect and defend the note ban, so can you take these measures
It has been by far the most disruptive structural change in the recent history of Indian economic policy. First, rendering illegal as much as 85 per cent of the floating currency stock, and then, also the currency that was not turned in, have been the government’s two “tough” calls. Much ink has been spilled over whether these were sensible moves and whether the objectives held out as the driving reasons have been met at all.
However, since the mood of the moment is to push for structural changes, no matter how risky they may be to popularity, this is the time to think about the next set of structural changes that could be pushed through. The government has demonstrated its proficiency in handling proposals that could have been fatal to popularity, by bringing to bear a combination of reductionist and simplistic logic and turning adversity into advantage.
More importantly, the appetite for swallowing structural changes that may cause pain has never been higher. Therefore, now is the time to move on some structural changes that are also backed by merit and reason, which should make them easier to achieve. If any of these sounds tough to carry out, remember, it cannot be tougher than demonetisation.
First, the role of our regulators, as currently structured, is crying for change. For example, the Reserve Bank of India as a regulator of banks can be divorced from its role as a central monetary authority. It is the latter that needs complete independence and autonomy; the former needs reform and clarity of thought. There is too much bundling of the regulatory objectives of ensuring good conduct by banks into the role of being a monetary authority, with a lack of clarity on which measure would address which objective.
Likewise, the Securities and Exchange Board of India inextricably interlinks the objective of regulating market conduct with that of prudential regulation. The former requires disciplining errant market players, the latter thinking on how to keep the market financially safe and how to ensure that intermediaries, who hold out promises to society, have the financial capacity to perform with intensity. The structure of the insurance regulator, or for that matter, the pension regulator, needs similar attention.
The very structure of the regulatory architecture needs attention. It is time to separate the functions of regulating players in the financial markets into one regulatory agency that would focus on prudential regulatory requirements. This regulator has to think and breathe issues relating to prudential norms applicable to market participants: what sort of net worth they must have, what capacities they must develop and nurture, what they must do to address risk to their own existence to keep the market safe, and the like. A separate regulatory agency must focus on abusive conduct by players in the market. It would have the task of taking disciplinary action for wrongdoing.
In short, the entire financial sector regulatory framework can be re-engineered and recast to end up with three agencies — the central bank, a prudential regulator and a conduct regulator. This is hardly an original idea — the United Kingdom has this structure. Demonetisation was not some original idea either. If that project can be achieved, so can this one, with far better outcomes.
Second, since our justice delivery system has been debilitated by a variety of state capacity issues, the small man does not get justice. There is too much focus on the speed of justice, with quality seen as being capable of compromise — a bit like not worrying about manuals of medical procedures when handling a large number of victims of disaster or war. Therefore, a Financial Redressal Agency, with its governance manned by representatives of the three regulators, can focus on redressing the grievances of smaller consumers of financial services. Today, a small complainant would be lucky if her letter with a tale of woe manages to get the attention of the governor or the chairman. If not, a computerised sarkari process deals with investor grievances in a robotic manner. A lot of this work is even outsourced by regulators.
Yet, regulators loathe ceding ground in this space, for the ability to call up senior officials of market intermediaries and direct them to address grievances gives them unstructured muscle power over market intermediaries. However, actually formal assured redressal of customer grievances is an activity that needs round-the-clock attention of a dedicated agency that can also build up intelligence of malpractices and abusive conduct detected when handling complaints, and providing that to the conduct regulator to take pre-emptive and curative steps. Focused collection of such intelligence would also expose organisations that adopt standard processes in abusive conduct across sectors. This would be a tough measure to implement, considering that opposition comes from the regulators themselves, but remember, it cannot be tougher than demonetisation.
Finally, in the Union Budget due shortly, the government must have the courage to waive or drastically reduce transaction costs for consumers using electronic payments. If one element of state policy pushes consumers to use electronic platforms and online payment systems, another must not impose a cost. The recent stand-off between banks and fuel stations was only a teaser; it can lead to a far bigger problem. If those providing payment platforms need to be compensated for their service, it would be a fit case for the government to transparently assess how they may be subsidised, if necessary, to keep the customer protected from becoming captive to ridiculous transaction costs. If demonetisation truly provides long-term aid to bring the economy into the banking system, there has to be payback and reward for consumers who “queued up with pride”. There can be no reward more appropriate.
This column was published in the Business Standard in the editions of January 19, 2017 titled Without Contempt