The Case for a Deeper Democracy

Context:  There is a strong connection between bolstering democracy and achieving a better functioning financial system

Benefits for democracy in a financial system

• Encourages investments: in building firms and building personal wealth as democracy prevents government using coercive power on economic agents.
  • Under the rule of law, private persons and economic agents feel safe that the coercive power of the state will be deployed in a predictable and rules-based way, impartially.
• Helps to maintain the focus of private persons on economic factors: like  understanding consumers, technology and efficient methods of running organizations rather than on  managing the political regulatory and bureaucratic environment,

Way forward: Bolster democracy to achieve a better functioning financial system.

• Create a common law framework: where legislators or regulators operate in a more principles-based way.
• Increase democracy: This will lead to increased financial development.
• Review and rewrite the legal-institutional architecture of the Indian financial sector: Financial Sector Legislative Reforms Commission (FSLRC) headed by BN Srikrishna gave the following recommendations:
  • Hear all viewpoints before drafting a law.
  • Remove the concentration of power with financial regulators (legislative, administrative and judicial) and bring in strong accountability mechanisms while ensuring its independence.
  • The regulator should adhere to draft Indian Financial Code (IFC) for supervision and reporting and to create a mechanism for judicial review for all actions of regulators through a specialized tribunal.