The fragmented nature of India’s financial sector often results in sidelining macro-economic considerations when it comes to formulating sectoral policies.
In the aftermath of the global financial crisis in 2008, the government of India undertook certain measures to promote financial stability and boost economic growth in the country. One such measure was the establishment of the Financial Stability and Development Council (FSDC) in 2010 under the Ministry of Finance. Its aim was to institutionalise and strengthen the mechanisms for maintaining financial stability and inter-regulatory coordination.
The Financial Stability and Development Council (FSDC) was undoubtedly the need of the hour, but the structural framework within which it operates has certain limitations. For instance, its non-statutory status hampers its functioning as an independent body responsible for assessing systemic risk, making recommendations and monitoring the financial system in a holistic manner.
Moreover, the FSDC currently operates in an opaque manner, and does not have a mandate to release information about its decisions or recommendations to the public. Therefore, the present structure of the FSDC is inadequate to deal with financial crises in a holistic and transparent manner.
Building better institutions
The Covid-19 crisis and its unprecedented economic ramifications have not only brought to the fore the shortcomings of the FSDC, but have also demonstrated the need for creating a streamlined statutory system dedicated to a more formal and cohesive approach to financial crisis management in India. In order to create such a statutory system, a crisis management agency should be set up as a statutory body under the Ministry of Finance, and replace the FSDC. This agency should aim to rectify the inadequacies of extant structures, and be built on the foundational principles of accountability and transparency.
Broadly, the focus of such a crisis management agency should be twofold — macro-prudential and supervisory. Its functions should include developing periodic assessments of macro-economic risks, monitoring the functioning of the economy, international coordination, anticipating potential risks, and coordinating with concerned regulators in a balanced manner.
Regarding the structural framework of the agency, it will be critical to ensure that it has financial and operational autonomy, and that its board has adequate representation from both the central and state ministries, besides having external experts, heads of regulatory bodies and an executive committee for managerial control and administrative functions.
In this regard, seeking guidance from frameworks adopted by similar institutions in other jurisdictions will be helpful. This can include the Financial Stability Oversight Council in the United States, which comprises heads of various government representatives; the Financial Policy Committee in the United Kingdom, which has diverse representation from the Bank of England, the Financial Conduct Authority, the private sector and academia; and the European Systemic Risk Board in the European Union, which consists of central bank representatives from member states and financial regulators from the European Union.
Making it happen
The primary components of the proposed crisis management agency for India’s financial sector should be as follows:
First, the agency should be established as a statutory body under the Ministry of Finance.
Second, the proposed statute setting up the agency should provide guidance for, among other things, its establishment, board composition, executive committee, eligibility of members, mechanisms for coordination with concerned regulators, risk assessment, risk management, supervision and monitoring.
Third, the statutory framework must ensure that the agency is an independent body with transparent functioning, and has adequate representation from the central government, state governments and relevant regulatory bodies.
The overarching consideration while formulating the organisational design for the agency should be to ensure that its functions are primarily recommendatory and supervisory in nature, and that there are effective mechanisms in place to ensure coordination between concerned authorities, as well as compliance with basic principles of the rule of law.
Setting up a crisis management agency for the financial sector in this manner will go a long way in dealing with the consequences of the Covid-19 crisis, and will be indispensable in ensuring that India is better prepared to deal with the complexities of future crises.
Towards a Post-Covid India is a briefing book with 25 legal reforms recommended by the Vidhi Centre for Legal Policy. Join a series of conversations — ‘Law with a Difference’ — on the book. ThePrint is the digital partner. Read all the articles here.
Vidhi's briefing book calls for a crisis management agency to be set up as a statutory body under @FinMinIndia to manage the fallout of #Covid19. Join Vidhi's discussion on July 29 at 6 pm – part of the #LawWithADifference series with @ThePrintIndia as digital partner. THREAD. pic.twitter.com/G8y4J4QKyU
— Vidhi Centre For Legal Policy (@Vidhi_India) July 25, 2020
Aishwarya Satija and Astha Pandey are Research Fellow and Senior Resident Fellow, respectively, at Vidhi Centre for Legal Policy. Views are personal.