Why Rajan is Wrong
B N Srikrishna
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The RBI governor is stonewalling reform by disagreeing on judicial review of regulatory decisions Orders passed by Sebi have showed a marked improvement once the SAT started reviewing them.
RBI would similarly benefit from judicial review
RBI would similarly benefit from judicial review
The Reserve Bank of India (RBI) governor Raghuram Rajan does not appear to think financial services need reform. In a recent speech, he highlighted what he believes are “areas of tension” in the report of the Financial Sector Legislative Reforms Commission (FSLRC).The FSLRC made recommendations to modernise the Indian financial system to assist growth of the real economy. The main focus of FSLRC was on governance reform and consumer well-being with clarity about objectives, powers and accountability of all financial agencies.
He appears to disagree on judicial review of regulatory decisions. There are two inalienable features of a constitutional parliamentary democracy that emphasise the rule of law.
First, the Constitution establishes the rule of law and Parliament is the proponent of such law.
framework. Not because it allows courts to second-guess decisions of those implementing the law but because it ensures that those implementing the law adhere to the Constitution and the laws made by Parliament.Else, the rule of law is reduced to mere ipse dixit of the executive.
Rajan is correct in stating that courts already have the power of judicial review. He, however, believes that adding a specialised tribunal to exercise judicial review will reduce flexibility. This is flawed. A specialised tribunal works more efficiently and develops greater domain knowledge when compared with courts, which are already overburdened.
dicial review on the grounds of “flexibility“ runs against the fabric of the rule of law.Even Rajan in his 2009 report, A Hundred Small Steps, says, “Regulatory actions should be subject to appeal to the financial sector appellate tribunal.“ In the absence of an independent and expert judicial review, the RBI's performance will remain discretionary or arbitrary , and this does not serve any public purpose. Countries that achieved high institutional quality have done so by using an effective judicial system to keep the executive and legislature under check.
Change of Heart With regard to the regulatory architecture, Rajan's report of 2009 emphasises the need to reduce the number of regulators and for defining the jurisdiction of regulators in functional terms. He says, “Without reforms, however, the financial sector could become an increasing source of risk, as the mismatches between the capacity and needs of the real economy and the capabilities of the financial sector widen. Not only would the lost opportunities be large but the consequences for the economy could be devastating.“ Now, he has repudiated a lifetime of advocacy of reform, with the status quo claim, “If it ain't broke, don't fix it.“
Two expert committees of the consumer affairs department, Habibullah and Padhi, followed by expert committees led by Mistry and Rajan, followed by the FSLRC, said that Sebi should regulate commodity futures.
Now, Rajan suggests futures would be better off with consumer affairs.
It's been tried and it failed.
Should we prepare for the future or remain complacent with the present? FSLRC's view was that peacetime is better to prepare for the future than wartime to fix things. Only legislation can drive institutional change to yield high performance institutions. The Indian financial code drafted by FSLRC appears to be the answer. The governor has said, “If it ain't broke, don't fix it.“ Another wise saying is that one must lead, follow or let others show the way , without accusing others of “schizophrenia“.
The writer chaired the FSLRC.
Co-authored with D Swarup, former secretary in the finance ministry, and member-convener of the FSLRC
He appears to disagree on judicial review of regulatory decisions. There are two inalienable features of a constitutional parliamentary democracy that emphasise the rule of law.
First, the Constitution establishes the rule of law and Parliament is the proponent of such law.
framework. Not because it allows courts to second-guess decisions of those implementing the law but because it ensures that those implementing the law adhere to the Constitution and the laws made by Parliament.Else, the rule of law is reduced to mere ipse dixit of the executive.
Rajan is correct in stating that courts already have the power of judicial review. He, however, believes that adding a specialised tribunal to exercise judicial review will reduce flexibility. This is flawed. A specialised tribunal works more efficiently and develops greater domain knowledge when compared with courts, which are already overburdened.
dicial review on the grounds of “flexibility“ runs against the fabric of the rule of law.Even Rajan in his 2009 report, A Hundred Small Steps, says, “Regulatory actions should be subject to appeal to the financial sector appellate tribunal.“ In the absence of an independent and expert judicial review, the RBI's performance will remain discretionary or arbitrary , and this does not serve any public purpose. Countries that achieved high institutional quality have done so by using an effective judicial system to keep the executive and legislature under check.
Change of Heart With regard to the regulatory architecture, Rajan's report of 2009 emphasises the need to reduce the number of regulators and for defining the jurisdiction of regulators in functional terms. He says, “Without reforms, however, the financial sector could become an increasing source of risk, as the mismatches between the capacity and needs of the real economy and the capabilities of the financial sector widen. Not only would the lost opportunities be large but the consequences for the economy could be devastating.“ Now, he has repudiated a lifetime of advocacy of reform, with the status quo claim, “If it ain't broke, don't fix it.“
Two expert committees of the consumer affairs department, Habibullah and Padhi, followed by expert committees led by Mistry and Rajan, followed by the FSLRC, said that Sebi should regulate commodity futures.
Now, Rajan suggests futures would be better off with consumer affairs.
It's been tried and it failed.
Should we prepare for the future or remain complacent with the present? FSLRC's view was that peacetime is better to prepare for the future than wartime to fix things. Only legislation can drive institutional change to yield high performance institutions. The Indian financial code drafted by FSLRC appears to be the answer. The governor has said, “If it ain't broke, don't fix it.“ Another wise saying is that one must lead, follow or let others show the way , without accusing others of “schizophrenia“.
The writer chaired the FSLRC.
Co-authored with D Swarup, former secretary in the finance ministry, and member-convener of the FSLRC
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