In his first response to the U.S. financial crisis after the collapse of Lehman Brothers, the takeover of Merrill Lynch, and the government bailout of the insurance firm, American International Group (AIG), Finance Minister P. Chidambaram declared that he saw no reason to halt financial sector reforms. After assuring us that there was no cause for alarm as Indian banks were not exposed or vulnerable like a couple of banks in the United States, Mr. Chidambaram asserted that the government would pursue reforms “having regard to context, having regard to the international situation, and having regard to our ability to keep regulations one step ahead of innovation.”
From the time the UPA government assumed office more than four years ago, the Finance Minister has been the most consistent in the pursuit of financial sector liberalisation. After the bursting of the real estate bubble and the financial crisis in the U.S., one would have expected this ardent advocate of financial sector reforms to rethink. But that has not happened.
From the outset, the Finance Minister and the Congress-led government have been trying to increase the FDI cap in the insurance sector from 26 to 49 per cent. They wanted to facilitate the takeover of Indian private banks by foreign banks by allowing them up to a 74 per cent stake in Indian banks and, for that, to amend the Banking Regulation Act to lift the voting rights cap of 10 per cent. The Finance Minister was also spearheading the move to put in place the New Pension Scheme, which would allow pension funds to be privatised and invested in the stock market. The Pension Fund Regulatory Development Authority (PFRDA) Bill has been pending in Parliament for the last two years. On top of all this, the Prime Minister declared that India would go in for full capital account convertibility.
The Left parties have strongly opposed all these measures. In 2005, they conveyed to the UPA government that if such laws were brought to Parliament, the Left would vote against them. In the UPA-Left Coordination Committee, repeated rounds of discussions were held on the opening up of financial sector, especially banking and insurance.
By the end of 2007, all the efforts to pressurise the Left to give up its stand against financial sector liberalisation failed. The Finance Minister could not hide his impatience at the blocking of the liberalisation moves. “If India has to grow at 9 per cent plus continuously,” Mr. Chidambaram declared on December 29, 2007, “its financial sector has to be modernised with the slew of reforms in the banking, insurance, and pension sectors.” He also said: “The UPA government is keen to push ahead with the financial sector reforms as it has only 15 months left in power.”
The Left parties put up cogent arguments against deregulation of the financial sector and further opening up of the insurance sector to foreign capital. In a note titled ‘On FDI in the Insurance Sector,’ to the UPA-Left Coordination Committee, they warned: “Events over the decade of the 1990s have borne out the fact that financial liberalisation does not contribute positively to investment and economic growth. Countries which enthusiastically opened up their financial sectors in order to attract capital inflows often experienced enhanced volatility in their financial markets and speculative attacks on their currency. Further opening up of the insurance sector to foreign capital, which serves as a vital financial intermediary of the national economy, is therefore not warranted.”
In a note on the opening up of the banking sector, the Left parties opposed the raising of foreign equity to 74 per cent and any move to dilute the government’s stakes in the public sector banks.
In the United States, deregulation of the financial sector began from the time of President Ronald Reagan. It has continued apace. In 1999, the U.S. Congress adopted the Financial Services Modernisation Act, which scrapped all regulatory restraints on financial services. Financial deregulation in the U.S. also exerted a decisive influence on the global financial system. It unleashed the forces of financialisation of the economy and the concentration and centralisation of power in the hands of a small group of financial companies. The investment banks and hedge funds played a key role in the restructuring of the financial system, which consisted of the use of derivative instruments like options and futures. It is this unbridled financial speculation through the use of dubious instruments driven by greed for quick profits that has led to the current financial meltdown.
The Finance Minister is well aware of these developments in the U.S. financial sector. Yet he insists that financial sector reforms are the key to growth and investment.
Now with a $700 billion package being proposed by the U.S. government to bail out the big financial companies and banks that have suffered losses, the stock markets around the world have (as the Financial Times headlined it) “roared in approval.” This will mean the biggest transfer of wealth at the expense of the taxpayers to help the fatcats and the speculators recoup their losses. This will be cited by neoliberal circles in India to argue that financial sector liberalisation will not harm the country in the long term — as long as “regulation remains a step ahead of innovation” (in Mr. Chidambaram’s words).
We have seen what innovations have taken place and are being proposed in India’s financial sector. In an illuminating address, Mr. V. Leeladhar, Deputy Governor of the Reserve Bank of India, showed how India actually favours foreign banks (rediff.com, December 8, 2007). He pointed out that India issues a single category of banking licence to foreign banks that does not require them to graduate from a lower to a higher category of banking licence. This places them virtually on the same footing as an Indian bank, which is in contrast to the practice in many other countries. Further, no restrictions are placed on the non-banking financial subsidiaries of foreign banks in India, or their group companies. Mr. Leeladhar pointed out further that, unlike in the case of Indian banks, the sub-ceiling in respect of agricultural advance is not applicable to foreign banks. While the export credit granted by foreign banks can be shown towards priority sector lending obligations, these are not permitted for Indian banks.
The Prime Minister mooted, in March 2006, the idea of introducing full capital account convertibility. At his initiative, the Reserve Bank of India set up the Tarapore Committee to recommend steps to make the capital account convertible. Incidentally, the Tarapore Committee also recommended that the government stake in the public sector banks be brought down to 33 per cent. The 1997-98 financial crisis in South East Asia was directly attributable to their capital account convertibility. India could avoid such a problem then because of capital controls. Far from ensuring “regulation ahead of innovation,” increasing FDI in insurance and allowing multinational banks to take over Indian private banks along with capital account convertibility will ensure progressive deregulation of the financial sector.
The Finance Minister had hoped that with the Left parties withdrawing support to the government in July 2008, the way would be opened for pushing ahead with the Banking Regulation Amendment Bill, the PFRDA Bill, and the Insurance Amendment Bill. The entire corporate media were in celebratory mode, urging the government to push ahead with financial sector reforms now that the Left was “not around to exercise a veto.”
The global financial crisis must open the eyes of all those who have uncritically supported financial sector liberalisation. Can they be unconcerned about the pension rights of millions of Central and State government employees? If the New Pension Scheme, initiated by the Centre and backed by the BJP State governments, is implemented, it will lead to thousands of crores of rupees of the employees going into the stock markets. No regulatory authority can stop the wild fluctuations in the stock markets. The New Pension Scheme does not assure a minimum return to employees. The net result will be that the employees will get, as pension, less than what they have been getting under the earlier scheme, that is, 50 per cent of their last salary.
All political parties should be concerned about what would happen to the savings of ordinary people and the pensions of working people, and about how public investment would be affected if India were subjected to the rapacious deregulated financial system prevalent in the United States. Let there be a serious effort to put in place measures to strengthen the financial sector of the country in a manner that safeguards the country’s economy and contributes to sustained development.