CHENNAI

쑺8 www.businessline.in/opinion EDITORIAL THE HINDU ● BUSINESS LINE

FRIDAY, NOVEMBER 27, 2009

VOL. 16 NO. 327 FRIDAY, NOVEMBER 27, 2009 The financial sector
Short on action
as a joint family
T
he Prime Minister, Dr Manmohan
Singh’s, visit to Washington — the
first State visit of Mr Barack Oba-
ma’s Presidency — was, despite

T India’s financial sector functions like a large joint family in

the rash of MoUs signed on the
sidelines, long on words and short on action.
Admittedly, a few macro “initiatives” — such as
the one on green partnership, clean energy and
climate change, and a 21st century knowledge
intiative — were launched giving the impression
that Dr Singh and Mr Obama were taking the
India-US partnership somewhere. However, it
would have been more useful from the point of
view of long-term strategic cooperation if major
steps had been taken on a couple of issues that
have been in focus in recent times.
The first of these is, of course, the climate
negotiations, which will be under the spotlight
next month at Copenhagen. Going by current
indications, the world does not expect much
progress on the issue given the rigid stand
adopted by some developed economies (the US
included) specifically on the subject of time-
barred, emission-reduction targets for major de-
veloping countries. The Joint Statement issued
at the end of the Obama-Singh summit does not
break any new ground on this although, clearly,
there was much scope to do so. What we have
instead is the bit about a “green partnership” —
to eliminate poverty, ensure sustainable devel-
opment and a clean energy future — which could
in fact be interpreted as an attempt to move
bilaterally on a problem that requires global
action for an effec-
tive remedy. In- 쑺 The Prime Min-
deed, to some ister’s visit to
people the “green
partnership” may Washington
appear to be the was, despite the
climate counter- rash of MoUs
part of bilateral/
regional trade ar- signed on the
rangements at the sidelines, long
expense of the Do- on words and
ha Round. On mul-
tilateral trade also,
short on action.
there was no effective movement forward in
terms of action, the intention being once more
repeated that both countries sought “an ambi-
tious and balanced outcome of the Doha Round
consistent with its mandate”. Perhaps the most
important aspect of the summit was the resolve
expressed by both sides to develop a Framework
for Cooperation on Trade and Investment, there
being mutual agreement to launch a US-India
Financial and Economic Partnership.
Dr Singh has mentioned the possibility of
talks on a free trade agreement between the two
sides along the lines of the one entered into with
Asean which, if anything, measures the confi-
dence of the Indian side in taking on US manu-
facturing interests on a level playing field. In
fact, with appropriate safeguards in place, the
he joint family is one of
the oldest social institu-
tions in India. It has
morphed and shrunk in-
to the nuclear family. However,
the ethos of the joint family per-
sists — this holds true not just for
households, but also the gover-
nance structure and behaviour of
the financial sector.
According to former Reserve
Bank of India (RBI) Governor, Dr
Y.V. Reddy, “the relationship be-
tween Government and public en-
terprises as also among the
enterprises has followed and is still
following what has been described
as the joint family approach…”
After nationalisation, a predo-
minant part of the banking and in-
surance system came under the
public sector fold. The institutions
belong to an extended family un-
der the government.
Many of them were created by
the RBI within its fold, including
the IDBI, Nabard and UTI, to men-
tion a few; these became ‘indepen-
dent’ later. The State Bank of India
and its predecessor, Imperial Bank
of India, performed central bank-
ing functions before the RBI was
established.
The extended-family form of
functioning brings with it not just a
set of negatives, but also some sig-
nificant advantages. A viable and
efficient model of financial archi-
tecture in India should aim at
strengthening the natural advan-
tages and minimising the negative
attributes of the joint family.
‘JOINT FAMILY’ ADVANTAGES
The joint family’s first and fore-
most strength is its resilience in
crisis situations. Even if the family
is divided, it becomes one in times
of crisis. Time and again this has
been proved in the Indian case. For
example, the entire reform process
to a certain extent was triggered by
the 1991 balance of payments cri-
sis.
The regulators’ joint action dur-
ing times of systemic crisis is now
well known, the instances being
the 1992 stock market scam, the
UTI debacle in the late 1990s and
the demat scam a few years ago, to
mention the major ones.
If this sense of unity is main-
tained during normal times, even
to the extent of about 50 per cent,
the strength of the system will be
unparalleled.
The second advantage stems
the government fold. This allows for coordinated action in
times of crisis, though the inefficient enjoy protection at zero
cost. The way forward is to retain the advantages of
the ‘family’ system, while infusing competitive
spirit, says K. KANAGASABAPATHY .
from the joint family’s informal na-
ture. There are no formal codes
governing its functioning. Of late,
there has been considerable debate
on formalising the coordination ar-
rangement among the regulators,
by according statutory status to the
high-level coordination commit-
tee. .
Dr D. Subbarao has rightly ar-
gued that any formalisation will
make the working arrangement
bureaucratic and reduce its flex-
AUSTRALIA-INDIA RELATIONS
ibility and speed in responding to
emerging needs. The current, in-
formal nature of the high-level
committee has also been support-
ed by the Rakesh Mohan commit-
tee on financial sector reforms.
The third benefit is the protec-
tion and security it offers to the
weakest in the family. In times of
critical insolvency, there is an ele-
ment of readiness to show forbea-
rance in various forms, which
includes bailing out or resolving
the problem through mergers or
amalgamations. Since the early
1960s, not a single institution has
been allowed to exit completely,
including cooperative banks,
which did not have the potential to
cause any systemic failure.
This is one reason why the RBI
wants the banking system to be
outside the ambit of the Competi-
tion Commission. Even on minor
issues, like marking to market the
losses in the securities portfolio of
banks, there is some willingness to
show forbearance by hiking the
held to maturity portion of invest-
ment portfolio.
The fourth advantage is trans-
parency. Knowledge and informa-
tion are shared across family
members and there is virtually no
privacy or special privilege to in-
formation.
This leads to a sense of natural
probing into everyone’s affairs; re-
luctance to share information is
shunned as an undesirable prac-
tice. This is, of course, a positive
attribute.
Even when supervision was kept
at arms length, supervisory infor-
mation about regulated entities
was available with the central
bank. SEBI has real-time informa-
tion about stock exchange oper-
ations. There is a regular
information-sharing arrangement
among the regulators.
This shielded the Indian finan-
cial system from the type of crisis financial development council un-
that occurred in advanced econo-
mies, which was triggered by lack
of information flow among impor-
tant stakeholders, including the
governments. Even credit rating
agencies did not get vital
information.
DEMERITS OF JOINT FAMILIES
First, the complacent attitude public sector institutions within
among family members tends to the family.
encourage inefficiency, at least
among some members. There are (The author is Director, EPW Research
free-riders.
There is also a strong element of blfeedback@thehindu.co.in)
moral hazard — weak incentives
for work and disguised unemploy-
ment. This is probably one reason
for flabby organisations in the pub-
lic sector. The joint family gives
one the security that no one will be
sent out of the family or be harshly
punished. This weakness should
be squarely addressed by creating
strong HRD policies among public
sector institutions, including the
regulators.
Any aggressive and necessary
reform is halted by the weakness
and inability of some weak mem-
bers, who are not able to raise their
level of efficiency to the desired
extent.
The implementation of Basel II
norms gets delayed because some
banks are not ready to face it. Many
hedging products cannot be intro-
duced, because the public sector is
not capable of coping with asso-
ciated risk management practices.
The marginal player decides the
level of reform, not even the aver-
age player.
Even the regulators are not free
from this problem. The RBI wants
to recruit people laterally from the
market, because of the failure to
train its supervisory staff, render-
ing them ignorant about new mar-
ket products and inherent risks.
Only healthy HRD practices can
help overcome the associated
weakness.
SUPER-REGULATOR DEBATE
The joint family approach and the
overarching influence of the go-
vernment over the entire financial
sector ‘family’ has rendered the de-
bate about creating a super-reg-
ulator in India rather irrelevant.
Even if such an institutional
structure is conceived of, we will
end up with something like what
the Raghuram Rajan Committee
has recommended, — creation of a
der the chairmanship of the Fi-
nance Minister. This will only
sanctify the present structure.
The real issue now is how far
functional, operational and finan-
cial independence to regulators
can be established and more in-
dependent and competitive envi-
ronment can be created among
Foundation. The views are personal.

Too many missed calls

forging of such an arrangement would seem to
be the next logical step in the ongoing India-US
economic tango. It is just a matter of time before
the nuclear deal is fully operationalised, which
would enable US companies to partake of the
Indian nuclear power pie. A closer economic
relationship (the US is already the biggest trad-
ing partner of India) would have the effect of
providing teeth to the much-talked-about “nat-
ural alliance” between the two countries.
쑺 LETTERS
Truth, reconciliation come to pass, as it may heal
쑺 India must pay more years, during which time he visited
China, Indonesia, Singapore, Japan,
attention to its the US, the UK, and many other
relationship with European and South-East Asian
countries, some of them twice.
Australia if it needs
TRADE TIES
a stable source of While Australia sees China as a stra-
raw material for its tegic partner, it perceives India
merely as a trading partner. India-
economic growth.
Australia trade was worth barely a
few million dollars in the 1970s. To-
Vidya S. Sharma day, India is Australia’s fastest
Indian diplomats completely
failed to notice the removal of trade
barriers in Australia and the conse-
quent arrival of a new player, name-
ly China. They failed to alert Indian
manufacturing industry.
Though Mr Rudd’s visit was
showcased as the start of a ‘strategic
partnership’, in reality it had the
same purpose as those of the minis-
ters who preceded him: Restoring
the Indian full-fee paying student
market to normalcy.

This refers to “Mumbai, a
year later…” (Business Line,
November 24) and your
other news items on the
26/11 attacks. No doubt, the
TV channels will devote
many hours to the events,
with more talk shows.
Though the media does
expose inadequacy in our
systems, why are the hard-
hitting questions not being
directed at our politicians or
government officials?
It is time the power of the
media, used subtly and
concertedly, pushed the
Government into setting up
a Truth and Reconciliation
Body, such as the one that
existed in South Africa, and
is now functioning in
Rwanda and Cambodia, to
arrive at the truth behind
events that alter the course
of nations’ histories.
The people in Mumbai,
especially the families of
those who gave up their
lives, deserve to know the
Truth, along with the people
of India. In the same way,
the Truth must be widely
known in relation to all the
incidents of communal
violence, especially in 1984,
the Babri episode in 1992
and the Gujarat riots of
2002. One hopes this will
Letters to the editor and contributions can be sent
by e-mail to: bleditor@thehindu.co.in
old wounds and improve
our system of governance.
A. Ramanathan
Chennai
Say no consolidation
This refers to the remarks
made by Dr K. C.
Chakraborty, Deputy
Governor, RBI, on the topic
of the day, viz.,
consolidation of public
sector banks. Though a
votary of the proposed
mergers in the broader
sense, the former Chairman
of a PSB has been sceptical
of the haste with which the
matter is being dealt with.
Despite the disastrous
consequences of neo-
liberalism, especially in the
financial sector in the US
and elsewhere in the West,
it is intriguing that our
policy-makers keep harping
on fast-tracking reforms.
The powers-that-be
would be well advised not to
gamble on the state’s
economic future in their
pursuit for more foreign
capital. Better to think of
strategies to strengthen the
capabilities of the PSBs,
instead of attempting to
dispose of them forever.
S. V. Venugopalan
Chennai
T
he Australian Prime Min-
ister Mr Kevin Rudd’s re-
cent visit to India was,
unfortunately, truncated
to less than 24 hours by the threat of
a coastal storm in Mumbai. In fact,
unfortunate timing and ill-judged or
miscalculated responses have char-
acterised India-Australia relations.
This unfortunate pattern started at
the time of India’s Independence
when India wished to remain in the
Commonwealth provided it could
choose its head of state.
The UK agreed but the then Aus-
tralian Prime Minister, Robert
Menzies, opposed it. The Australian
foreign policy establishment has
since classed India a difficult coun-
try. This impression was reinforced
when India co-founded the non-
aligned movement.
Following in Mr Menzies’ foot-
steps, the John Howard govern-
ment opposed India’s admission to
the Asia-Pacific Economic Cooper-
ation (APEC) Forum. Prior to that,
when the Vajpayee government
tested nuclear weapons, Mr Ho-
ward’s response was far shriller
than that of the US or the UK.
Even today Australia does not
consider India a country of strategic
regional importance. This is evident
from the fact that Mr Rudd visited
India after being in power for two
growing export market.
Until recently, Australia’s exports
to India primarily comprised
mining and agricultural products.
Now its service exports alone
(mainly Indian students there) ex-
ceed India’s total exports to that
country. The trade balance will tilt
further towards Australia when the
$20-billion Gorgon gas supply con-
tract becomes operational.
Australia has also pursued a more
pragmatic policy in exploiting avail-
able trade opportunities. India has
largely missed out on Australian op-
portunities for three reasons: First,
until very recently India’s foreign
policy efforts were aimed at Europe
and the US. Second, Indian politic-
ians concentrated on shoring up un-
productive relationships with
largely failed or struggling nations
in the non-aligned movement.
Third, the intrinsic inability to
shake off lethargy and a lack of
imagination of the Indian foreign
affairs mandarins is also partly to
blame: while India had a tiny foot-
print in the 1970s in the Australian
marketplace, China had none at all.
Yet, Australia’s exports to China
in 2008-09 touched A$32.5 billion
(mainly raw materials) and it im-
ported Chinese goods worth A$35.3
billion, comprising mainly of house-
hold goods and their parts.
In this context, the Indian go-
vernment must have been disap-
pointed at the absence of concrete
efforts by the Australian Govern-
ment to identify and close down un-
ethical and sub-standard private
education institutions (four more
entered receivership last month) in
that country. Mr Rudd also failed to
announce any new steps to enhance
the safety of Indian students.
The Indian Government must in-
sist that Indian students receive
education of the same standard
available to Australian peers. The Prime Minister, Dr Manmohan Singh, with his Australian
counterpart, Mr Kevin Rudd, during the lalter’s recent visit to
URANIUM SUPPLY India… While Australia sees China as a strategic partner, it
While Dr Manmohan Singh ex- perceives India merely as a trading partner.
plored the possibility of uranium
supply, there was no positive move- trade that China has left India way Australian mining companies and
ment on the issue. Mr Rudd’s re- behind. real estate. Knowing that China has
sponse was both misleading and been actively impeding India’s stra-
contradictory when he asserted that CHINA — ELEPHANT IN THE ROOM tegic aims (for instance, blocking
there was bipartisan consensus in China has been busy grooming Aus- Indian attempt to gain a permanent
Australia to not sell uranium to In- tralian politicians of differing per- seat on the UN Security Council,
dia. After India had negotiated the suasions. The grooming starts well preventing the listing of certain Pa-
civil nuclear cooperation agreement before they enter parliament, as was kistan-based outfits as terrorist or-
with the US, Mr Rudd’s predeces- recently shown in the case of the ganisations at the UN, and so on),
sor, Mr Howard, had decided to sell former defence minister Mr Joel India must pay more attention to its
uranium to India. It remains the Fitzgibbons. relationship with Australia if it
policy of coalition parties in Opposi- He had directly or indirectly ac- needs a stable source of raw materi-
tion as well. cepted so many favours from Beij- al for its economic growth.
It is worth recalling two facts ing that he could not list all of them The attempted takeover of Aus-
here: it was under Chinese pressure even after being given two opportu- tralian mining assets by China is
effected through the left wing ruling nities to set the record straight. causing unease both within the Aus-
Labour party that Mr Rudd revers- Even Mr Rudd’s trips to China, tralian community and its corporate
ed the previous government’s pol- when in Opposition, were paid for world. India and its companies are
icy; further, his position is by Chinese entities. not viewed with such disquiet. This
inherently contradictory because Suffice it to say that China is in opens window of opportunity for
the Rudd Government had voted for the process of snatching Australia Indian companies.
the ratification of the US-India civil away from the US or Western orbit.
nuclear cooperation agreement at Having acquired an almost vice-like (The author is Melbourne-based and
the International Atomic Energy grip on Australian consumer spend- specialises in organising joint ventures
Agency meeting. It is not only in ing, China is now actively pursuing between companies in Australia and Asia.)

CH-X