The Union government’s proposal to set up a Financial Stability and Development Council “to strengthen and institutionalise the mechanism of maintaining financial stability” has not been widely welcomed. The idea was put forward by finance minister Pranab Mukherjee in his budget speech last month and government officials have indicated that the body might be set up next month. It will have the responsibility to monitor the ‘micro-prudential’ regulation of the economy and address inter-regulatory co-ordination issues. There is the need for better co-ordination between the regulatory bodies in different areas, like the RBI in banking, the SEBI in the area of securities, the IRDA in insurance, etc. There is already a high-level co-ordination body for this which admittedly has not functioned effectively. But the answer is not to have a super regulator with a full time secretariat which will constrain the functioning of autonomous bodies like the RBI.
The effective role of the RBI in guiding the economy through the recent turbulent times is well-known. It has in the past also been known for judging correctly the problems in the financial system and taking timely remedial measures. Other regulatory bodies have also functioned well in their own areas. The formation of another body to oversee their work dilutes their independence and autonomy. Their sense of accountability will also be affected when they know that there is another body watching over them. They will also be slower to respond to situations which call for their intervention. The financial sector has become so complex and varied that decentralised regulation is the best way to maintain its health. Unification of regulatory authorities has not worked well in other countries too.
The proposal to have the union finance minister as the head of the proposed council makes it more problematic. Regulatory authorities like the RBI have functioned to a large extent independently of the government. It is not advisable to have the finance minister at the head of a body that seeks to co-ordinate the actions of autonomous regulatory bodies. It might even lead to the introduction of a political element in their functioning. Mukherjee has sought to allay these fears but his assurance is not convincing. There have been problems of jurisdiction and turf battles between regulatory bodies. They can be solved or avoided if there are better mechanisms of interaction between them.