Arun Jaitley’s Budget 2015 is bold in its stance, futuristic in its approach, and above all, reformist in its spirit. While there will be much written and critiqued on its boldness (a frontal attack on black money, for instance) and future-preparedness (the fall in corporate taxes to 25 percent in four years from 30 percent today), I will look at a two mega-reforms, both financial, that his Budget has unveiled.
The first looks inward at the domestic financial sector. Under this, the major reform is placing consumers of finance, the average household, at the centre of all laws. “A properly functioning capital market also requires proper consumer protection,” Jaitley said. “I, therefore, propose to create a task force to establish a sector-neutral Financial Redressal Agency (FRA) that will address grievances against all financial service providers.”
As consumers, all of us would have experienced the push towards an insurance product when we went to invest in the Public Provident Fund or a mutual fund. In an environment of institutionalised mis-selling, we don’t know where to go, whom to complain. All we seek is a return on investment at a low cost and transparent architecture. Under the FRA, we will have a single complaint management agency to go to.
“The FRA will setup a nationwide machinery to become a one-stop shop where consumers can carry complaints against all financial firms,” the Financial Sector Legislative Reforms Commission (FSLRC) report states, and which Jaitley has started actioning. Gone are the days of running from one regulator to another as firms, wearing the garb of universal banking, wreaked havoc on the savings of Indians. Who, for instance, is liable for a mis-sold insurance policy by a bank — banking regulator RBI or insurance regulator Irda? The answer now will be: FRA.
But Jaitley doesn’t stop his reform at simply the creation of one more regulator. There is a thought-through system behind it – the Indian Financial Code (IFC). “I am also glad to inform the House that work assigned to the task forces on the Financial Data Management Centre, the Financial Sector Appellate Tribunal, the Resolution Corporation, and the Public Debt Management Agency are progressing satisfactorily,” he said. “We have also received a large number of suggestions regarding the IFC, which are currently being reviewed by the Justice Srikrishna Committee. I hope, sooner rather than later, to introduce the IFC in Parliament for consideration.”
This is big – really, really big. In effect, the IFC disrupts existing regulatory structures and recreates a more cohesive, more accountable financial architecture that oversees nine important moving parts – consumer protection, micro-prudential regulation, resolution, capital controls, systemic risks, development and redistribution, monetary policy, public debt management, and contracts, trading and market abuse.
The IFC is one law that alone is a giant reform. By placing the consumer at its core, the IFC completely changes the contours of India’s financial sector that so far has been held hostage to companies that thrive on anomalies and regulators too busy playing turf-wars than focusing on customer services and protection. From financial repression to legitimising mis-selling, IFC will hopefully change that for good.
That said, it won’t be easy to implement. The IFC is an extremely bold law to enact: all told it will replace 61 existing laws – no, you didn’t misread that, the number is sixty-one – and the NDA government will need all its political skills and then some to convert this idea into a living reform. It will be opposed within and outside Parliament.
Behind each of these laws stands a large community of vested interests backing it and the fight to repeal or amend them will be fought tooth and nail. Not just individuals like insurance agents or companies that benefit from weak regulations, but don’t be surprised if pushback to these reforms comes from some of the regulators themselves, notably the Reserve Bank of India and the Insurance and Regulatory Development Authority of India.
Ironically, the two keywords the vested interests will use to scuttle the IFC will be “public interest”.
The second mega-reform looks outward and eyes the global financial sector. “While India produces some of the finest financial minds, including in international finance, they have few avenues in India to fully exhibit and exploit their strength to the country’s advantage,” Jaitley said. “GIFT (Gujarat International Finance Tec-City) in Gujarat was envisaged as International Finance Centre that would actually become as good an International Finance Centre as Singapore or Dubai, which, incidentally, are largely manned by Indians. The proposal has languished for years. I am glad to announce that the first phase of GIFT will soon become a reality. Appropriate regulations will be issued in March.”
Although the need for an international financial centre had been felt for a long time, ever since India opened up in 1991 and Indian companies began to expand their footprint globally, this is an idea that has taken all of eight years to turn into reality. The idea was planted in the Report of the High Powered Expert Committee on Making Mumbai an International Financial Centre, popularly known as the Percy Mistry report, in 2007.
Mumbai has remained where it was but GIFT has taken root in Gujarat. GIFT is a globally-benchmarked international financial centre that will target 8-10 percent of financial services on 84 million sq ft of space and create one million new jobs – 30,000 by 2016 from 700 today. Its core operations will include offshore banking; insurance, assurance and reinsurance; regional financial exchanges and back offices.
Since an international financial centre, of the likes of London, Singapore or Dubai, can’t just live on money, GIFT is being created as a smart city with schools, hospitals, clubs, entertainment centres and so on to attract top talent from across the world. The urban infrastructure being planned is world class. The only question that’s being repeatedly asked by executives, both Indian and foreign, is: since it is located in a state of prohibition, will booze be available?
India’s international financial centre will occupy the time zone that’s currently lying vacant, between Singapore to the East and Dubai to the West. But that’s only semantics. If it rises to the occasion, it will be able to pull back a lot of markets that India has lost. Much depends on execution, some of which has begun. Phase 1, for instance, is in an advanced stage of completion, and institutions such as World Trade Centres, State Bank of India, and a Bombay Stock Exchange tower have already committed to it.
These two reforms go hand in hand and seem to be part of a larger plan. Together, they are a game-changing reforms. While the IFC rebuilds the domestic financial architecture, GIFT becomes a hub for international finance. These are also in tune with the larger objectives of Make in India, an endeavour that will need finance in order to gather momentum. These are not incremental, but mega-reforms and will reshape the contours of India as it becomes the world’s fastest-growing modern economy.