Jaitley-Rajan battle over financial code is imagined, not real

QUICK PILL

The skirmish

• The buzz is that Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan don\'t get along

• A revised draft of the Indian Financial Code is being seen as part of their battle

• The proposed Bill purportedly curtails the powers of the Reserve Bank and its chief

The facts

• The Code was commissioned by then-finance minister Pranab Mukherjee of the UPA four years ago

• It incorporates RBI\'s own preferences about transferring some of its functions

• A unified code to govern all financial regulations and regulators makes a lot of sense

When a husband and a wife start denying that there are differences between them, that is the beginning of the end.

That outcome is not inevitable between Union Finance Minister Arun Jaitley and Reserve Bank Governor Raghuram Rajan, for not only is theirs an arranged marriage, but cohabitation is not a matter of choice.

The minister carries finance at the behest of the Prime Minister, who could remove the governor as well, though none has in our history.

There is also a difference in capabilities. While Jaitley can sit in the front row of the annual Fund-Bank meetings, he does not have much of an international market. Rajan could find a chair in the world's best universities and a place in international financial institutions when he wants.

He may not need to, for his quiet, unostentatious way of making economics easy has the PM amongst his fans. Jaitley, probably, can go back to legal practice or become a judge. But their marketability is irrelevant; the differences between them are not so serious.

The revised Code

The current chatter about their differences has been spurred by the revised draft of the Indian Financial Code, unveiled by the finance ministry. It is a lawyer's masterpiece: its 19 parts, 414 sections and four schedules cover 188 pages.

It is unlikely that those who are not lawyers will bother to wade through it. But those who take the trouble will be pleasantly surprised: the Bill (for it is really an act waiting to be approved by Parliament) is written in plain, clear English.

That gives away its parentage: it is a child of the Financial Sector Legislative Reforms Commission, which was appointed four years ago by our current President, Pranab Mukherjee, when he was the finance minister, much before the BJP even dreamt of coming to power.

P { margin-bottom: 0.08in;The draft Indian Financial Code is an attempt to bring all financial regulators and regulations under one law

The government passed a welter of laws and created a number of financial regulators over the last eight decades, beginning with Reserve Bank of India in 1934. The laws often overlapped and were based on conflicting principles, and the regulatory institutions fought and got into the finance minister's hair.

So the commission was charged with consolidating the financial laws and coming up with a compact, consistent version. It reported in precisely two years, on 31 March 2013. But the UPA government did not have the energy or determination to take legislation based on the report through Parliament.

The specifics

It is to the finance minister's credit that the law proposed by the commission has been put on the ministry's website for public study and comment.

The proposed Bill closely follows the legislative architecture the FSLRC proposed: that there should be a financial development and stability council to formulate financial policy and oversee financial regulators and a tribunal to try financial disputes and save them from the mess of ordinary courts.

It also stated that the Reserve Bank should continue to function as regulator of currency and banking, but that monetary policy making should involve both the policy makers in Delhi and the Reserve Bank, and that public debt management should be transferred from the Reserve Bank to a committee steered by the finance ministry.

This is not quite the practice in industrial countries, which generally tend to leave monetary policy to the central bank. But the government in India is far more embroiled in the financial sector: it is the owner of financial institutions and has convoluted policy objectives. So it is understandable that it should want to stay more involved in financial sector policy than is common in the West.

An imaginary skirmish

In my view, whatever the truth may be about the relations between Jaitley and Rajan, and the differences between them, the Indian Financial Code provides no evidence of them.

It is the result of a policy decision taken by UPA years ago to consolidate financial regulation, which was perfectly explicable in the context of its messy state. The transfer of some of the functions of the Reserve Bank it envisages is consistent with the Bank's own preferences, and makes perfectly good sense.

This may disappoint those who enjoy a good row amongst famous functionaries; but for those who seek betterment rather than sensation, the Indian Financial Code is the most important reform after 1993.

It has been years in the making, and it may be years more before it finally becomes law. But it is progress based on careful legal and economic craftsmanship; it shows that reforms have not yet ceased.

It is also a good sign that the government has decided to show the proposed legislation to the people and ask them to give their reactions. It would have been even better if the Code had been accompanied by a note in simple English describing what it is meant to achieve. But all is not lost yet.

The views expressed here are personal and do not necessarily reflect those of the organisation.