Montek differs with FM on reforms

Montek differs with FM on reforms
Financial Express, November 5, 2009, Page 10

fe Bureaus, New Delhi

A day after finance minister Pranab Mukherjee said the government would only undertake key financial sector reforms in pensions and insurance only after achieving a political consensus within and outside the UPA coalition, deputy chairman of the Planning Commission Montek Ahluwalia sounded a warning that any move to stop financial sector reforms ‘would be a serious mistake.’

Ahluwalia’s comments also assume significance as the Reserve Bank of India (RBI) and the finance ministry have differences of opinion with the financial reforms agenda espoused by the Prime Minister’ economic advisor Raghuram Rajan. As reported by FE on Wednesday, the finance ministry and the RBI have scotched a series of recommendations by the Rajan committee report on financial sector reforms.

“Rajan’s recommendations are not new. You may ask if this is the right time or should we shut down financial reforms. We have learned a lot from the global financial crisis. But none of the reforms we are talking about lend themselves to create systemic instability that led to the crisis. It would be a great mistake to stop financial reforms… a lot remains to be done,” Ahluwalia said.

Referring to the pending insurance and pension bills, Mukherjee had said on Tuesday, “Ours is a system where we have to carry people with us. Legislation requires both houses of Parliament to approve them. If we don’t have consensus there, it will be difficult to get Bills passed. Our intention is not enough, it has to converge with the views of other political parties, within the coalition and outside the coalition. We shall have to persuade and try to come up with a consensus. At the earliest opportunity, I would like to get it done.”

Stating that India has been implementing financial sector reforms in a calibrated manner, Ahluwalia said, “The real lesson of the global crisis is that opening up the capital account in an unrestricted manner to highly mobile short-term capital flows could add volatility. So we have followed the principle of keeping the capital account restricted and freeing foreign direct investment and institutional investment flows.”

“In the coming year, capital inflows will rise again as the world recovers from the financial crisis. People want to come and invest in India and that’s a good thing. Excessive capital flows may be a problem, but RBI knows how to handle them,” the Plan panel deputy chairman pointed out.

“The financial reforms agenda must continue. Any assumption that we should stop reforms in view of the global financial crisis would be a very serious mistake,” Ahluwalia underlined.

Reacting to concerns about rising food prices, Ahluwalia said that this time next year, food prices won’t be as high. He also called for tempered debates on the food price inflation as the interests of urban consumers cannot be used against increasing farm incomes by raising minimum support price. “We must acknowledge that 50% of our country depends on the farm sector for their livelihood,” Ahluwalia pointed out.