Prioritizing the Pending Bills

Dalal Street Investment Journal May 2009

V. Shunmugam[1]
Being mandated to be at the helm for the second consecutive term, the UPA government is faced with the daunting task of discussing a few critical finance bills if it intends to take the reforms to the next level, for higher economic growth. Selection and rejection of these bills would be challenging as each of them would have its own merits for an early clearance. While clearing these bills it may not only be useful to heed the issues raised by the respective ministries and departments in deciding the priority but it would also be in the fitness of situation to take the call keeping in view the broader need of the economy.

Having clocked around 9 percent growth every year over the last five years, the economy is set to slow down during the current financial year. The situation is predicted to deteriorate further during 2009-10, with many international and domestic agencies pegging the growth at less than 5 percent. The direct impact of this slowdown is being felt in terms of losses in jobs, as many facilities have either closed down or scaled down their operations in light of plummeting demand. According to the labour ministry, about half a million Indians lost their jobs in a matter of just three months between October and December 2008. The situation is not likely to reverse any time soon given the longer reversal time. While an increasing number of unemployed labours would, understandably, become a social threat, the government, on its part, has been making earnest efforts through stimulus packages.

With such clouds of uncertainty, arising from the ongoing financial crisis, casting their shadow over the domestic economy, it may be just apt for the government to supplement its monetary and fiscal measures with the passage of reform-oriented bills to fight the slowdown. And it may not be much difficult to identify such bills if the importance of strengthening regulation to avoid any major misadventures of firms that could risk the economic growth and employment, and the need to propel the economy are kept in mind. In other words, the bills seeking to strengthen regulation and boost economic growth should be given priority.

Coming to the pending bills, the most striking in the current context is the Banking Regulation (Amendment) Bill that seeks to provide the RBI with more flexibility in tinkering with its monetary policy, providing, among others, more operational flexibility to the central bank to fix the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) so as to make more funds available for stirring growth taking into consideration the inflation target. The amendment also provides the banking regulator with the larger regulatory power to order special audits of cooperative banks for increased effective supervision in public interest that could help in inclusive growth by strengthening the cooperative sector and improving their performance.

The bill that assumes urgency, next, for clearance is the amendment to the Forward Contracts (Regulation) Act, 1952 bill. This aims mainly to restructure and strengthen the regulator of the Indian commodity futures market, the Forward Markets Commission (FMC), on the lines of other key regulators such as SEBI, TRAI, and IRDA. FMC currently enjoys limited power yet regulates a large portion of the country’s commodity derivatives market. For an important and sensitive sector like commodities in India where a large segment of population still lives below poverty line, the need for proper monitoring and, hence, a powerful regulator become all the more critical. A well developed and regulated commodity market would, no doubt, create more direct and indirect investment and employment in the real sector.

Prominent among other bills are the Companies Bill (2008) and the Insurance Laws (Amendment) Bill (2008). By replacing the existing Companies Act, 1956, the Companies Bill does away with the criterion of minimum paid-up capital to start a company, provides for appointment of minimum 33 percent independent directors on board, and allows a single person to set up a company to encourage entrepreneurialism. The domestic insurance sector holds huge potential of new investment since the penetration of insurance is currently abysmally low with insurance premium collection estimated at 3 percent of GDP against the global average of 8 percent. Microfinance Bill which was expecting clearance for long could be another catalyst for inclusive growth. The passage of these two bills would impart a much-needed stimulus to investment and employment besides ‘inclusive growth’. Keeping in focus the broader objective of essentially catapulting the Indian economy to a higher growth trajectory, taking effective care of systemic risks would help the new government serve its mandate.

[1] Author is Chief Economist with Multi Commodity Exchange of India Ltd., Mumbai. Views are personal.