Budget 2015: Is govt trying to curtail financial regulators' autonomy?
Mahesh Nayak February 28, 2015Finance Minister Arun Jaitley's announcement to merge commodity-markets regulator Forward Markets Commission (FMC) with capital-markets regulator the Securities and Exchange Board of India (Sebi) seems to be the first step taken by the government to make Sebi the super-regulator.
Though the merger of FMC with Sebi was anticipated in the market, it isn't the best of moves for India. Sebi has evolved after 25 years of existence, whereas FMC has been regulating the electronic commodity exchanges for only 10 years. It would have been better to give more teeth to the FMC rather than a merger.
World over, the commodity market is three to four times bigger than the bond market, which in turn is four to five times bigger than the equity market. But in India the equity market is the biggest and commodities is a smaller market, while the debt market is a non-starter. The government hasn't taken measures to develop the commodity and debt markets but is taking the easy way to give more teeth to Sebi.
However, the merger may not be as bad as it looks as it would help investment and getting good people into FMC, which didn't have the money to expand its infrastructure. As Sebi is an independent body it can invest in FMC to improve the functioning of the commodity regulator. But that's only one side of the story. The second side -- the government has given Sebi unbridled powers to rein in erring companies, powers of the kind that courts of law usually enjoy. Sebi is free to pass orders to search, confiscate, attach property, and even arrest defaulters and pass disgorgement directions to recover the wrongful gains made in contravention of laws.
The reason why today's move seems to be a major step towards creating a super-regulator is that the government has also taken a small step to regulate the Reserve Bank of India (RBI). The finance minister announced the formation of a monetary policy committee, which is a measure to take over the RBI's autonomy. The Budget is an indication that the government doesn't have the tools to bolster the economy and it's on the mercy of the RBI to revive growth. The government wants the RBI to cut rates and the central bank is not bowing to the demand of the government. The monetary policy committee is the first step to cut the RBI's power on domestic and overseas investment cap. The government could not have taken a bolder step as it would have given a wrong signal to the world and the global investors. Even market experts believe that taking away the RBI's control on investments isn't the best move by the government.
Last week, the difference between the government and the RBI came into light when Governor Raghuram Rajan, in a speech, mentioned Hitler and cautioned that a strong government may not always move in the right direction, while suggesting a middle path between unchecked powers to the administration and a complete paralysis.
This is not the first time that differences have come to light between an RBI governor and a finance minister. But the government never took away the autonomy and restricted the functioning of the RBI. There were differences between P. Chidambaram and then RBI Governor Y.V. Reddy but the government never interfered with the central bank's working. The government is trying to control the autonomy of financial regulators but it would not be in India's interest as investors have loved India not only for it being a growth market, but because the regulators saw to it that the markets never had a structural impact during the crisis.