The American financial meltdown, and the largest bailout package approved by the US government, has led to interesting discussions. Globally, economists are talking about the “death of capitalism”. In India, the anti-reforms brigade is congratulating itself for opposing liberalisation, which, it claims, saved India from the impact of the US financial crisis. Even Finance Minister P. Chidambaram agreed that the Indian “banking system is reasonably insulated from what is happening in the rest of the world”. This feeling may force the UPA government to postpone crucial financial sector reforms, which it hoped to pursue in the run-up to the national elections next year.
What is being overlooked in these high-pitched debates is the role of the regulators and policymakers, especially in India. India needs more reforms, if only to address the existing systemic problems. However, their pace needs to be regulated by the decision makers. We can’t go too fast, too soon. Neither do we need to open up the financial sector merely because we are being asked by the US or other powerful nations to do so. We have to do it only if it benefits us, and at a time that we feel is opportune.
At the same time, the regulators and policymakers have to think of reforms in terms of the benefits that will accrue to the small investors and household depositors. Reforms should not—and cannot—only aim at addressing the concerns of the investment bankers, brokerage houses, foreign banks and FIIs. All policies should seriously consider whether such liberalised moves will improve the lives of the mass common denominator, i.e. people like you and I. In this context, the regulatory mechanism needs to be strengthened, not weakened.
Unfortunately, this hasn’t happened. Worse, policymakers have tried to talk up the stock markets, instead of ensuring that small investors don’t lose their shirts. Each time there has been a massive correction, they have tried to assure the investors that there was nothing wrong with the markets, or that foreign investors were still investing in Indian equities. The RBI has tightened a few screws here and there, but it has not done anything concrete. Most of Sebi’s investigations into market wrongdoings have come a cropper. Hopefully, the US crisis will enable the policymakers to realise that they need to do both—sound brave and act bravely.