Deregulation in India: The Financial Sector's Role

The Indian government seeks to deregulate various sectors to boost business health. However, finance plays a pivotal role as the lifeblood or "oxygen" necessary for the success of these reforms.

Current Deregulation Efforts

• The Financial Stability and Development Council (FSDC) is tasked with reviewing regulations but isn't equipped for comprehensive deregulation.
• The FSDC focuses on financial stability, coordination, literacy, inclusion, and macroprudential supervision rather than rigorous impact evaluations.

Need for a Dedicated Financial Deregulation Commission

• A separate commission is needed to deregulate the financial sector effectively.
• This commission should incorporate a Regulatory Impact Assessment (RIA) framework to evaluate the costs and benefits of regulations.
• External experts should be involved to provide unbiased perspectives and challenge existing regulatory norms.

Issues with Current Regulations

• Existing laws favor state-owned entities over private players, affecting competition and service quality.
• State-owned banks and insurers benefit from capital injections without adhering to the same corporate governance standards as private entities.
• The IMF's Financial System Stability Assessment (2024) suggests aligning regulatory standards for state-owned and private-sector entities.

Challenges with Regulatory Practices

• Regulators have excessive discretion, imposing stringent conditions that deter market entry.
• Eligibility criteria for certain financial services exclude genuine smaller entities, limiting competition.
• Regulators are encroaching upon non-financial areas, creating potential conflicts with cross-sectoral frameworks.

Conclusion

For a successful wave of deregulation, the financial sector must have its own dedicated deregulation commission to ensure a balanced and sector-appropriate reform process.