The recent past has shown that every time Indian policymakers have exercised what looks like excessive caution, they have been rewarded. Conversely, each time they have pushed through something in a hurry, they have been burned.
The latest example of the former is the resilience exhibited by our banking sector in light of the meltdown taking place in the US and Europe. On the flip side, there are numerous examples of rushed policies being botched—prominent ones being demonetisation, GST, and the farm laws.
Let’s start with what India has gotten right through its caution. Take the policies put in place by the Reserve Bank of India and the Ministry of Finance regarding cryptocurrencies. Since December 2013, the RBI has issued several public notices over the last decade, warning potential investors of the risks associated with investing in cryptocurrencies.
Even when the crypto craze started gaining momentum and was capturing the public imagination in 2017, the Finance Ministry took the firm stance that investments in cryptos were as risky and compared them to Ponzi schemes. In February this year, RBI deputy governor T Rabi Sankar said that cryptos “may be even worse” than Ponzi schemes.
In his last Budget speech in 2018, then Finance Minister Arun Jaitley was clear in saying that the government “does not consider cryptocurrencies legal tender… and will take all measures to eliminate use of these cryptoassets” as part of the payment system. That is, no transactions at all would be allowed in cryptocurrencies.
He was, however, quite supportive of blockchain technology, on which cryptocurrencies are based, but which has a wide range of uses well beyond cryptos.
Jaitley’s attitude towards cryptocurrencies and blockchain has stayed with the government till now. In Budget 2022, Finance Minister Nirmala Sitharaman announced a provision to tax profits arising out of cryptocurrencies, which gave hope to the industry that legal recognition was round the corner.
Also read: Yes Bank’s AT1 bonds tell the tale of broken financial regulation in India
Slow and steady
But this was the government at its cautious best. What they basically said was that if you profit from the sale of cryptocurrencies, then you have to pay tax on those profits. But if you lose money or are a victim of fraud, you’re largely on your own, because there’s no regulator to turn to. Legal recognition remains elusive.
Now, look at this caution this way. Had India welcomed cryptocurrencies with open arms, there would have been every chance that a meltdown like the one that happened with FTX in the US would have happened here. The reason it hasn’t is because our regulators are extremely risk-averse.
So, you can have some crypto investors losing some money because the prices have dropped, or you can see them falling victim to scams, but the number and scale of such incidents are far smaller due to the discouraging attitude taken by the government.
Another example of India’s cautious approach being the template for policies around the world is the way we have reacted to the Chinese app TikTok. In June 2020, the Indian government banned TikTok and 58 other apps, citing privacy and national security concerns.
Sure, this had the not-so-subtle undercurrent of getting back at China due to our geopolitical tensions and border skirmishes, but it looks like the ostensible issues of privacy and national security are real. The US is reportedly seriously considering banning TikTok unless the parent company sells its stake.
The US isn’t the only one to follow India’s lead. The European Commission, the EU Council and the European Parliament have all banned TikTok on their officials’ phones, as have the UK and New Zealand.
Finally, we come to banking regulation. Yes, India’s banking industry has earned a pretty poor reputation due to the profligate lending that took place in 2009-13, and the subsequent high rates of non-performing assets, and the collapse of banks and NBFCs like Yes Bank and IL&FS.
But the fact is that this mismanagement was on the lending side, where individual discretion played a much more important role than regulation (or the lack thereof) did. On the deposit side—which is where the US regional banks are currently facing their crises—India has robust regulations and standards.
The most important thing is that the RBI, early on, decided that the globally-agreed best practices on banking regulation—the Basel III guidelines—would apply to all Indian banks. In 2021, the central bank extended this to even include All India Financial Institutions (AIFIs) such as EXIM Bank, NABARD, National Housing Bank (NHB), and SIDBI.
This is not the case in the US. There, a significant lobby forced the government to relent and allow smaller banks to remain outside the remit of the Basel III norms. This is how the banks like Silicon Valley Bank, Signature Bank, and Silvergate Bank could operate with such imprudent practices.
It’s great to see that the RBI is following this careful approach to the launch of Central Bank Digital Currencies as well, where it’s running extensive pilots before doing a full-scale launch.
Also Read: RBI data reveals demonetisation was the epitome of whimsical, illogical policymaking
Haste makes waste
Now, let’s get to the rush jobs that have been shown to have been error-ridden. The first, of course, is demonetisation. If the idea was to curb black money, data shows that that failed since all the cash returned to the system. If it was to stop terror financing, that too was short-lived since it all flowed back once cash returned to circulation.
If the idea was to push digital transactions and greater formalisation, the former would have happened on its own due to the sheer convenience of UPI, and the latter would have happened about eight months later when Good and Services Tax was launched. GST would have led to an increase in tax collections as well, another reason given for demonetisation.
This brings us to the launch of GST itself. The great strength of GST was that it was based on the matching of invoices of the buyers and the sellers, and so could theoretically plug a whole lot of leakages. Pushing GST onto an unprepared economy meant that invoice-matching was put on hold for several years.
GST is undoubtedly a great reform, but its greatness has been severely limited so far due to a patchy and hurried rollout.
Then we come to the now-infamous farm laws. Even though you’ll find very few non-political farmers actually saying the laws were harmful, the government’s rush in pushing them through meant that it didn’t spend enough time convincing the more vocal farmer groups. The end result was that it had to embarrassingly revoke the laws.
India has done a great job in many areas of regulation because it has taken the time to think things through. The ongoing banking crises in the US and Europe should show the Indian government the value of this caution, and encourage it to abandon its haste.
The author tweets @SharadRaghavan. Views are personal.
(Edited by Prashant)