The Journey of Economic Reforms

Business Standard     31st August 2020     Save    
QEP Pocket Notes

Context: The journey of economic reforms involves multiple institutions and individuals over a long gestation period.

Evolutionary Reforms in Reserve Bank of India (RBI):

  • Temporary Nature to Conceptual Clarity:  Temporary nature was enunciated in the RBI Act 1934, which has been amended to be removed, providing it with a conceptual foundation.
  • The necessity of Inflation Targeting:
  • Challenges:
      • Liberalization led to the inflow of capital in India, which increased inflation.
      • Constraints imposed by the ‘’impossible trinity,’ i.e. no country can retain monetary policy autonomy and manage its exchange rate and have capital account openness.
    • Reforms: leading to inflation targeting framework and increasing the accountability of the RBI.
      • In 2007, the Percy Mistry committee recommended that India adopt inflation targeting.
      • Reiterated by the Raghuram Rajan committee in 2009.
      • In 2013, the Financial Sector Legislative Reforms Commission (FSLRC) led by Justice B N Srikrishna recommended the procedures of the Monetary Policy Committee (MPC).
      • This was followed by the Urjit Patel committee on monetary policy reform,
      • Ministry of Finance replaced “Ways and Means Agreement” (used for monetization of fiscal deficit) with the Fiscal Responsibility Budget Management Act (FRBM).
      • Monetary Policy Committee was established in 2016 for inflation-targeting.
  • Future Reforms: Implementing the well-established agenda for reform of banking regulation and bond market regulation,

Evolutionary Reforms in Reserve Bank of India (RBI):

  • The necessity of Reforms: 
    • Challenges: The first banking crisis of India, in the late 1990s, brought the problems of debt recovery to the fore.
    • Reforms:
      • Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, gave lenders the power to recover collateral when there was a default on secured credit.
      • The Raghuram Rajan Committee of 2009 first talked about the need for full-blown bankruptcy code.
      • The Budget speech of 2015 had a paragraph about a new bankruptcy framework for small and mid-size enterprises.
      • A bankruptcy legislative reforms commission led by T K Viswanathan recommended modification in Companies Act and draft bankruptcy code.
      • Insolvency and Bankruptcy Code was established in 2016.

Conclusion: There are more examples like goods and services tax and anti-money laundering laws, which are similar in nature. India needs more of these in all sectors, and certainly in the areas of finance and the economy.

QEP Pocket Notes