At a time when the government is unable to push through financial sector reforms or divestment, a Planning Commission-appointed panel has recommended that the government sell its stake in public sector banks, allow more foreign flows into the bonds markets and rework the regulatory landscape.
In addition, the committee on financial sector reforms headed by Raghuram Rajan, professor at the Graduate School of Business, University of Chicago, and former chief economist of the International Monetary Fund (2003 to 2006), has suggested a shift to a true auction method for securities, besides seeking a reduction in the period between auction and listing.
It wants the Reserve Bank of India to adopt a hands-off approach in managing exchange rates and has suggested that the central bank shift to inflation targeting, using short-term rates to manage liquidity and changing interest rates when inflation goes above or below the objective.
It also said capital flows will pose a problem in the coming years, more so on the outflows front.
While opposing capital controls, the panel in its draft report, which has been put up for public comment, has suggested a steady opening up of the rupee bond market, which may include a larger play for foreign investors, which Finance Minister P Chidamabaram hinted at recently.
A liberal approach on outflows includes allowing insurance companies and provident funds to invest abroad. A diversification into foreign government securities has also been suggested but the panel said the timing for such initiatives is critical.
For instance, it pointed out that the foreign investment limit in bonds should be raised when capital inflows in other areas are low.
To improve the financial markets, the 10-member committee, which consisted of leading bank CEOs, lawyers and academicians, said all regulations related to trading, including those on government bonds, should be supervised by the stock-market regulator Securities & Exchange Board of India.
The move, the committee said, will strengthen the interconnected markets, improve liquidity and increase competition.
Besides, it wants the regulators to accord faster approvals to new products and is against any bans - other than action against manipulators - to ensure that there is no investor uncertainty. The reference was in response to banning commodity futures trade in agricultural products in February last year when inflation was rising.
Markets that are missing like exchange traded interest rate and exchange rate derivatives are also needed, the committee report said.
During its four years in office the United Progressive Alliance government has been unable to push through most of its financial sector reforms agenda including more voting rights to foreign investors in Indian banks, more foreign investment in insurance and pension sector liberalisation.
Similarly, there has been virtually no movement on the recommendations of the expert panel chaired by former World Banker Percy Mistry on making Mumbai an International Financial Centre.
Even the report acknowledges that, saying: "Clearly, there is little urgency for reforms because India is not in a crisis. This is where the political leadership is of the 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 committee has argued that besides speeding up growth and reducing vulnerability during periods of uncertainty, like the present one, reforms can help financial inclusion, a buzzword with the government in recent months.
But it said the inclusion strategy should be reworked with lower priority sector targets and entry of private small finance banks. Besides, a suggestion has been made to emphasise providing equity-linked products to a bigger population.
The other part of the reforms roadmap charted out by the committee is a change in the regulatory landscape with fewer regulators so that there are fewer restrictions on investment choices by domestic institutional investors.
What the report says