Interpreting India

Demystifying India's Financial Sector with Suyash Rai

Episode Summary

Suyash Rai, in conversation with Srinath Raghavan, provides a comprehensive analysis of the opportunities and challenges for India's financial sector.

Episode Notes

Suyash Rai, in conversation with Srinath Raghavan, provides a comprehensive analysis of the opportunities and challenges for India's financial sector.

References:

  1. Unelected Power by Paul Tucker
  2. Regulation in India: Banking by Suyash Rai

Episode Transcription

(Intro) Srinath Raghavan: Hello and welcome to interpreting India. I'm Srinath Raghavan and this is the podcast presented by Carnegie India. Every two weeks we bring to you voices from India and around the world as we unpack the role of technology, the economy and foreign policy in shaping India's relationship with the world.

Suyash, welcome to interpreting India. 

Suyash: Thank you Srinath for having me. 

Srinath: I want to start by asking you to give us a bit of a bird's eye view of the financial sector in India. It's been in the news lately. We've had the issue of stressed assets in banks being in the news for some years now. There have even been private banks like YES bank, which seem to be in trouble. There has been all this stories about the non-banking financial companies. The NBFC says they called starting with the ILFS issue last year, but continuing into now housing finance and more recently we've seen, you know, all the stories around cooperative banks, particularly the Punjab and Maharashtra bank issued recently. So perhaps you could begin by giving us a sense of what exactly are the kinds of issues that the Indian financial sector as an aggregate faces and then we can get into details.

Suyash: So if you want to understand the Indian financial system, there are two basic facts that you need to start with. One is that the Indian financial system is heavily bank led. So across the world that you have different types of institutions dominating, playing different types of roles in financial system. Indian financial system is extremely, I mean, bank oriented, a lot of financial intermediation happens through banks, savings get transformed into investments through banks. The second important fact to keep in mind is that they there are substantially, even today, government owned. So, if you look at public sector banks, the vast majority of the deposits go to public sector banks. Insurance  life as well as long life - is still very much government dominated. These two facts then kind of interact with the realities of the Indian economy and create different types of situations in different points of time. So one situation you can get is a very rapid increase in lending to infrastructure because it is a government priority, you can get that, you can get relatively easy financing of fiscal deficit of the government because government does have kind of a control over the buy-side of many of the government’s own bonds. 

If you look at the current moment, there is a history of that moment. We had a big economic boom of sorts from 1993 to 2010 from within this time from 1999 to 2008, we had a massive credit boom. It was unprecedented in Indian history, year on year in real terms, adjusted for inflation, credit growth, bank credit growth, of more than 20% year after year. And, it just went on and on. But when the economy started slowing down, one thing that we realized is that many of the firms had actually over stretched themselves. They were assuming that the boom will continue, it's a Chinese story, it will not be a two-decade boom, it will be a three-decade boom or a four decade boom, or it will be a Singapore story which is of a half a century long boom. But that's not how things turned out. So many firms got into trouble. They were not able to service their debt. They were not earning enough to service their debt. So banks started seeing the stress. The first response to that, and this is where the regulatory, institutional story begins, was to delay the recognition of this problem, allowing restructuring, there were four or five schemes for restructuring of loans that the Reserve Bank of India actually allowed. And this went on for several years. It's only in 2015 that we actually saw a proper recognition of what was the status of banks and March 2016 is when the first report came out in terms of fully recognizing the scale, and then it kept increasing because there was an ongoing effort to bring out the problems clearly. Restructuring schemes were ended. As a result of this process that was going on inside banks, there was still a demand for borrowing, many firms in fact wanted to borrow just to keep themselves alive to be able to repay the loans, a lot of this borrowing moved to NBFCs. Non-banking financial companies are companies that usually very few of them are allowed to take deposits. In fact, in the last couple of decades or so no new licenses for deposit-taking NBFCs have been given. So they are mostly financial firms that raise their resources in the wholesale markets. They borrow from banks, they borrow from markets, so on and so forth, and then they lend. If you look at the first principles, because they don't take deposits, unless they are systemically very important, and if their failure leads to a systemic crisis, we shouldn't worry too much about their success or failure. But NBFCs in India do borrow a lot from banks, which creates a certain kind of contagion risk, but a lot of borrowing went to them and it was not just borrowing by corporates, real estate and infrastructure, but also consumer borrowing went with to them, because it was a time when banks were hesitant to lend they were stretched for capital because you should see understand that in 2016 when you realize this it still took some time for banks to be recapitalized, they were undercapitalized for many of them were under-capitalized around that time. That's the story that we are seeing playing out. Cooperative banks, the story is quite similar. They also took, some of them took exposures to sectors which are currently in decline - housing finance, real estate, infrastructure, power, those kind of sectors, those that took that, some of them will fail right? Because I mean it's natural for an economic slowdown for some financial firms to also fail. But the problem with cooperative banks is the relatively weak regulation and supervision. If you are an urban cooperative bank, you are regulated by RBI for banking and by the registrar of cooperatives for cooperation activity, So there's dual regulation of governance everything is under the registrar for cooperative, they have the ultimate power to take difficult decisions when it comes to these banks. If you are a rural cooperative banks it is more complicated. These two are there - registrar and RBI. NABARD is a supervisory authority which is actually doing inspection and monitoring. So these institutional problems also accentuate the difficulty. Just to complete my point, we have a big gap in our institutional setup when it comes to the financial sector, which comes out during times of crisis. We don't have a proper law that governs the resolution or bankruptcy of financial firms. The insolvency and bankruptcy code doesn't cover financial firms. It only covers non-financial firms and in the last few years you have seen the consequences of that gap.

Srinath: So the story you're telling could, could it be read as a cyclical one or is there really a structural issue? 

Suyash: So cycle is a part of any modern economy. So growth and de-growth happens as a matter of fact, in any modern capitalist economy, but when the cycle is, as long as the one, we had almost 20 years going, the bust that comes after the boom is also quite significant. We saw the failures of our regulatory system. We saw the problems in of government ownership. For example, banking crisis in India is a public sector banking crisis. As a percentage of their assets the nonperforming loans of the public sector banks is four times of what they are in private sector banks. Last I checked about 16% plus of the loans in public sector banks were non - performing and only 4% of the loans in private sector banks were non performing. The crisis is a public sector bank crisis and why did that happen? Because you have to go back to the way the lending decisions were taken in that period of boom they were in lending to infrastructure grew by 80 times in less than a decade. The banks didn't lend to infrastructure much earlier. We had development financial institutions and all. All of them failed or were converted into banks. So then this moved to banking. That's one structural issue that came out clearly that we don't really have a banking system in which the decisions are fully and kind of independently taken by private firms interested in maximizing the shareholding value. We don't have a system in which these firms can be, the banks, for example, can be properly regulated for the risk that it takes because where is the incentive to regulate a public sector bank? We had an instance in one day, one third of the market capitalization of Punjab National Bank was depleted in one scandal, not even one branch saw a run, right? Because no depositor expects the banks to fail – government is standing behind with taxpayers’ money behind it. Similarly, institutional failures on the bankruptcy side came out. By 2016 we had a modern law. It is still working its way through. Let’s see where the political economy of India takes this law, and the final settlement that happens, and the equilibrium that we reach. We are still going through the pains of weak and failing financial firms – and we don’t have a modern law to deal with those. So, there are many structural problems which come out during the time of crisis. It is an opportunity to respond to those, because you should not let a crisis go waste, as the cliché goes. 


Srinath: So maybe you know we can break it down somewhat sector by sector, right? I mean let's start with public sector banks or banking in general of which public sector banks are clearly the, the sort of lion share of the problem is with them. And what exactly was the nature of the problem? Was it, as you were saying that public sector banks were asked to get into the infrastructure financing story but that was also a consequence I believe of a decision to get the private sector involved in the private public partnership model. Right? So when you get private sector involved in a partnership model to do infrastructure construction, it is a certain kind of a choice that you make. It's a political economy choice and then you get public sector banks to lend to those companies, some of which were clearly dubious in their ability to carry out these kinds of large projects. And then when those projects got stuck because of various kinds of things, regulatory standards …

Suyash: regulatory failures, courts 

Srinath: or even their abilities simply of some, some companies to deliver on those projects. Then you basically have a banking system, which is saddled with much of this bad loans. The other problem seems to be to be somewhat more relaxed lending norms in the wake of the global financial crisis of 2008 was that an issue as well?

Suyash: So, from what we see in the data on credit boom, the boom period in India actually, preceded the crisis in fact after the crisis the credit growth actually declined quite significantly and it has been steadily declining I mean there's not been anywhere close to the kind of lending growth like we saw between 1999 to 2008. So that was the year of boom. On some components of lending we have seen a little bit of this, for example in recent years you see, the consumer lending has, increased significantly. It may be because banks are looking for opportunities to grow their books in sectors where still there are opportunities to lend. You can lend against people's incomes and you can lend against some collateral that people put up - individuals are still able to do that. But the big part of the story is the corporate lending story, which is the infrastructure and other sectors, large corporates - most of the NPAs actually come from these sectors. So earlier the story used to be very different. NPAs were dominated by the so-called priority sectors, which were the farmers and the small enterprises and different sectors.
 

Srinath: So, those were sectors which the government had identified... 

Suyash: Identified that you should lend to because your developmental objectives will be met. Bulk of the NPA's used to come from that about 40% of the loans. But now the story is reversed. It is actually much more that large corporates and large projects which are funding. And if you go deeper, and I had done a study on this, on capabilities to underwrite loans, public sector banks did not have this capability, they are not structured to do this. They have this model in which three years they spend in rural banking, three years in international banking, three years in corporate banking, you don't build deep expertise. So if you want to go deeper in institutional questions, they actually relied a great deal on advice by consultants and external parties on the viability of a project because they didn't have in-house expertise. Now they may have built it the hard way but they didn't have that expertise. So a lot of the stories actually if you look at the breakup of the bad loans overall in the financial stability report that RBI brings out. A lot of it is in these sectors - power, infrastructure sectors, other large corporate where the big loans have gone.

Srinath: Is there a political story to it as well because these are public sector banks. You know, there are all these arguments about crony capitalism saying that, you know, the political class typically tends to lean on the banking sector to lend to corporate to whom they want to give projects and so on. And is that an issue as well?

Suyash: It is difficult to say whether phone calls were made to make a lending, but opacity does help large dominant players in a political economy. If you are a very large firm, which is able to, which has a story to tell and you are able to impress upon a bank that this project is going to work and there is a thousand crore loan immediately that you can give and meet your targets and so on and so forth, then it is possible that you can take an advantage of that opacity. If you had a more bond market kind of borrowing, market would figure you out or somebody in the market will figure out what's happening,

Srinath: And they would call you out.
 

Suyash: But this one-on-one opaque relationship-based approach does favor these people naturally. I mean automatically there is a... And in addition, they may have been, they was certainly a policy push towards lending for infrastructure. Why do you go to the banks? Because that's where the money is. So that's where the intermediation in India happens. So, there were structural reasons. Whether there were specific corruption that somebody made a call and said you lend to this person. We don't have evidence to at least be able to say that.

Srinath: Right. So this is the problem. We've seen several attempts by the government to fix the problem. There have been infusions of capital in liquidity into the banking system. It has been done in bit tranches, including one which was announced in the latest budget. But is there something that needs to go beyond simply recapitalization of banks? You know, there are arguments about saying maybe there's a moment to think about harder things like saying privatization of public sector banks. What do you think of those kinds of arguments?

Suyash: So I think it's a very complicated problem because if you privatize public sector banks today, tomorrow there will be a run on those banks. They are very fragile banks. Their robustness comes from this faith that depositors have that the government is standing behind them, otherwise there is not that much trust in these banks, especially because of the experience of the last few years. You've seen crisis after crisis come out of public sector banks. Some are out of private sector banks also, but the story in public sector banks is much worse. So you need to think about it as a longterm.... 

Srinath: But why can't we move towards a deposit insurance kind of scheme? 

Suyash: We have deposit insurance which covers up to one lakh rupees per depositor, and this actually fully covers 92% of the deposit accounts in the banks, although in terms of the value of deposits about 28% is covered by the deposit insurance scheme. But that's after the fact. If a bank fails, then you close the bank and you pay the deposit insurance amount. But while the bank is still alive, and government is not willing to let a public sector bank close, because it will create a havoc in the system.

Srinath: Depositors are also voters, right? So there's going to be political consequences.

Suyash: So two things - one is you have to reduce the government ownership of, of these banks and take it below 50%, but not immediately. You can't do it. You need to build, do this gradually, uh, one by one. You can do it with a few banks, but before you do that, you need to fix the bankruptcy system for, especially for banks. You need to, like in the US you have the federal deposit insurance corporation. They enter the bank early when it's about to fail. They merge it with another bank, and keep the depositors' interest protected. Deposit insurance is a very bad way of protecting the depositors' interests. If you've studied the experiences of deposit insurance, even in India, it's very painful because after the bank is closed it takes more than a year to actually get your deposit insurance. That one lakh rupees also. It's not the way to do banking. Banking is about liquidity and safety and continuous access to your funds. So this is the last resort. The first resort should be resolution. 

Srinath: So let me move on to another issue which you brought up while we were talking about banks, which is the sort of peculiar absence or immaturity of the corporate bond market in the context of India. Right. I was looking at some figures and you know the debt markets in India are less than 15% of GDP in overall size, whereas banks and equity markets are like 90 and 80% right? So these are clearly much more developed, whereas the debt markets are so underdeveloped. So what are the reasons behind that? Why is it that corporates are forced to go to banks and majority of which are public sector banks. Is it a supply side issue? Is that a demand side issue? What's the problem? 

Suyash: So let me give you a big picture view on this. If you want to talk about development of bond markets, you have to talk comprehensively about the system in which bond markets function. So there's bond market, there's currency markets and there's derivative markets. All these three markets are linked to each other. When I'm buying a bond I am taking a credit risk on the company that is issuing that bond, I'm also exposed to the interest rate risk, interest rate goes up and the value of my bond goes down. There's a risk that I hold on. If you are a foreign investor you also are holding an exchange rate risk. So there are different types of risks that I'm holding some I want to hold because that's the kind of risk that I think I am capable of holding and I will take it that I will get the return for that. Other risks I want to manage. So to be able to develop a bond market we need to develop the currency and derivative markets as well. But that's just the finance leg of it. You also need to develop monetary and fiscal institutions in which people have faith. That uh, some stability in inflation you will maintain, some degree of sanctity in fiscal institutions needs to be maintained. It's not like suddenly government will decide to increase its borrowing by 3% of GDP. And then the interest rate will go up suddenly and then therefore you are the one who would be paying the price for that because if you have a stock of bond the values immediately will crash. So there is a question of building the larger system in which the bonds market, the currency markets and derivative markets, they all kind of function well. That's the kind of aspiration if you want to talk about it, this is the way to talk about it. You have to look at that as one system which is to be developed. You can't look at bond market or long-term bond market or infrastructure bond market. There is nothing like that. There's a market in which they are these kind of segments and they are all linked to each other. The institutional problem in India, I mean why I think it's not happening is because the regulation is currently quite fragmented. So corporate bond markets up to one year are regulated by RBI, currency markets are regulated by RBI, derivative markets are regulated by RBI. SEBI regulates corporate bond markets for more than one-year maturity and RBI is also is a banker to the government and it is also a manager of government debt. It owns the depository for government bonds. It owns and runs the exchange for government bonds. It also, uh, has a significant role to play with along with SEBI in some of the trading on bond derivative that happens on NSE and BSE, and those are very small segments right now. They have not taken off the way they should. So one thing that you have to see is - where is the success on markets in India? It's in the equity markets and that story is the SEBI, NSE, BSE, story. You've got clearing corporations that are working well, exchanges which have built modern capabilities. There are days in which the trading volume on them that is the highest in the world. So they've built modern capabilities to do these things. SEBI has built some capability to regulate markets. We should try to tap into that expertise - bring securities regulation inside SEBI. That's one step. Make RBI a proper inflation targeting central bank, whatever the inflation targeting you may have - you may want to to use CPI or something else whatever it is, you need to have that kind of commitment. Take the role of debt management out of that because that's a conflict. There is a direct conflict there. So that there is stability in people's belief in fiscal and monetary institutions and how they will work. Then it's going to happen step by step manner. People will first trust to, to uh, uh, with one year, two-year money, they will not immediately start giving you 30 year money because you don't know where India is going in 30 years. Slowly you will build trust and you will see the full yield curve, liquidity across. You'll have a six-month paper or one year paper, five year paper, ten year paper you'll have liquidity across. That's how, I mean that's the story that you need to get to. But uh, there are steps along the way. There are regulatory reforms that need to be made. There are restrictions today on who can participate, for example in the government bond market, which is the, I mean, benchmark, um, paper that you have. 

Srinath: 

Why is that the case? I've never really understood why the government of India would restrict say foreign portfolio, in or foreign institutional investors from buying government of India, rupee denominated debt in India. I mean, what's the problem? 


 

 

 

 

 

 

 

I mean they do it because perhaps they think that there might be a sudden outflow of FPIs at all. That might look bad for the country and those kinds of reasons. But this is actually not a very good reason. Reason to do that. Portfolio investment should be free and open. Bring as much as you want to bring. It's just liquidity in the secondary market, which is an important precondition for development of the primary market. But one piece of the puzzle that I didn't talk about much but I will just mention on this is that today the buy side in very significantly controlled by the government, and by regulators. Banks are forced to buy government bonds, insurance companies are forced to buy, provident funds are forced to buy, and more than their prudence would require. It's not that you did a calculation on liquidity risk and try to come up with how much government bond they should own. 


Srinath: So basically government debt is crowding out other forms of bond markets from this one market. 
 

Suyash: And it’s one market, this one market unless this part also works like a proper market where there's actual benchmarking is happening. Today the yield on which is a benchmarking right the government bond yield is not actually indicative of fundamentals. That would be my claim because the demand side is so much constrained and government does have ways to kind of ensure that that market is not really working like a market 

Srinath: Right. And is there also a problem that you don't have say pension funds in India which are quite as large as they are in other economies, which then tend to be the main, you know, people who soak up corporate debt and then provide them.

Suyash: So that's a demographic issues. So demographic and policy. For the longest time we had the main recipients of pensions were the civil servants, and they had defined benefit pensions. We moved to the defined contribution where the new pension system and scheme since 2003 and since then we are building a corpus of pension funds. There are some private pension funds also. They are also very small. Uh, plus we are also a very young country. I mean median age is some 26, 27. Last I checked. And uh, as you grow older, your pension funds will also get larger. But globally they're very large pools of capital which are actually currently working on a very small rate of return. And here is India, which is a capital starved country. I am talking about financial capital here, not others - the household financial savings is getting crowded out by government. It's really central government - on and off budget, plus state governments put together , basically most of the savings are been cornered by them. We could benefit from accessing a lot of that and that would also create a certain amount of, uh, pressure to do reform because unless you fix the bond currency derivate markets people will not lend to you , or they will to you at a much higher rate than would otherwise be possible. So the demand side is very important for the supply to actually respond in a manner that is suitable, for these regulators to function, for the government to do the right kind of things. But right now that is heavily constrained in India. Indian institutions are heavily regulated and controlled by these policies where you don't have that much freedom to move.

Srinath: Okay. We've talked about banks, we've talked about money markets. I want to focus a little bit on the NBFC or the non-banking financial companies partly because it's all been in the headline. But also there are concerns that the weakness of this particular sector might have, as you said earlier, certain kinds of contagion effects. And it's certainly compounding existing problems with the banks and other parts of the economy. So could you just give us a snapshot of what exactly the nature of this problem is? 

Suyash: So first of all, when the NBFCs are a problem, NBFCs are a problem, only if they take deposits from uh, consumers or if their failure leads to a systemic crisis. For the rest we should not worry, and people who hold shares in them or give money to them will take some losses. And in fact if you go back to the thinking on financial system reforms in India in the 90s, in Narasimham Committee Report there was a clear mention that that this is a place where innovation can happen. And that's the way I think it's still valuable to look at NBFCs. What has happened in this current situation is that lightest regulation has meant almost opacity. Like there is not much transparency on who is giving money to whom. There's not much transparency on who has exposure to whom, which has created a lot of uncertainty in the market. If you have transparency along with normal creative destruction - NBFCs will take some risk, and if risk will go bad, they will fail. And those who, lend to them can take those losses. 

Srinath: But why can't we do an asset quality review for NBFCs the way it was done for the banking system in 2015?

Suyash: You can do it, which I think they are now kind of to beginning to do with the large ones, but from the first principles point of view, it is not so important to intensively supervise and regulate NBFCs unless their failure is actually systemically important, which we don't have a good system on. RBI has this category of systemically important NBFCs but it's a very low bar. So therefore, because it's a low bar last I think it was 2.5 billion rupee or higher of assets because you are low bar so many NBFCs come under it. They're not intensively regulated. What we need a system in which NBFCs are properly, systematically important NBFCS are identified, those have to be intensively regulated for exposures and different things and for them you need to do a regular review and all of that . There's a lot of uncertainty in the market. There's a lot of opacity. You should do a kind of, at least for the large NBFCs a review and they have the powers to do it. 

Srinath: Right. So Suyash if you take a step back and you've worked very extensively, including with the financial sector, legislative reforms commission, that's a mouthful. And you've also worked on the sort of Indian financial code which was drafted at that point of time. You've been part of these discussions. So if you've take a step back from our current set of financial issues, all of which seem to have an interlocking character, right? They are, they're related to one another. So it's not like you can do peace meal one by one fixing, you know, you have to think as you saying, somewhat systemically about what the nature of the problems are. And if you said that the government has to do two or three things as the first steps towards, you know, overhauling these issues and maybe moving in the direction of the success stories that we've had, like with equity reforms in the past, what would be the two or three things that you would highlight as areas where the government should put its political capital in? Because as you've been saying, I mean, this is not just a simply economic or financial issues. These are issues of political economy. Absolutely. You know, every investor is also a voter.

Suyash: It will take statesmanship to fix these issues because the current system actually works really well for the very powerful capital interests in India. If you have banks who are able to lend to, you know in an opaque manner and not even acknowledge that you have defaulted on their loan and keep restructuring your loan, it works well for you if you are a borrower. So it will take some degree of statesmanship to kind of go after these problems and see where do we want to go in the long run? But I would just say a couple of points. I said many things along the way during this conversation. But if you want to address this problem, you have to go after the institutions. And reform the institutions that actually make the regulations and are participating in these markets from the point of view of making the policies and doing the oversight and all of that. So there are two types of problems. One is the way the current institutions are structured. I mean from the point of view of role definition as well as internal structuring of the institutions. And the other is the question of which are the missing pieces. So one missing piece we talked about is the, absence of a resolution authority.

Srinath: A bankruptcy code. 

Suyash: That we need urgently. we needed it yesterday. Um, the other is that we have a fragmented regulatory system where the main regulators are four of course RBI, IRDA, SEBI PFRDA, but there's more, like EPFO is the regulator for Provident Fund. So you've got the NABARD doing supervision for regional rural banks as well as rural co-operative banks. You've got a big problem of this dual regulation in cooperative banks, which we have to fix. I mean over time we need to come to a more rational and sensible approach. All of these, have some political economy around it. There are good reasons why cooperative banks remain under regulated and somewhat in the grey space. So you need to go after this problem. Second is the way the institutions work. Most of the financial regulators in India, we have studied this, actually don't follow best practices of regulation making. They don't have the level of transparency in the way they make regulations, the way they implement those regulations, the way they issue orders, the internal checks and balances on, for example, if somebody is accused of some particular violation and then the person is found guilty or there should be some kind of separation there should be some Chinese walls those are missing. We also need to think about the kind of laws that we want to have in the financial system. Today our laws are basically a legacy of basically going back to 84-85 years but since then we have many, many laws along the way and amended them and all that. The FSLRC, the Financial Sector Legislative Reforms Commission Festival you refer to, was an attempt to look at this kind of set of laws 60 plus laws that we have looked at and say, can we try to bring them together under a coherent kind of framework? Because finance is one - now increasingly the boundaries are breaking. You know, you go to an insurance company, you can invest, you are not just taking a risk product, you can go to a bank and buy investment product, insurance products - front end is a bank often. You don't really go to an insurance company to buy it. So there's a lot of this happening. So you need a certain degree of coherence in the way risk management in institutions is done, the way consumer production is done. Ttoday, we don't have a law in India or any law that puts a basic framework on what is the level of protection that is promised to consumers of India. Like in UK, Australia, in many countries you have got clear that these are your rights as consumers and you can use those rights in your contest with the bank or insurance company that you think has defrauded you or whatever it is, abused its power. we need that. We need to have a coherent systemic risk framework. What is happening in India? because of this fragmentation and many of the businesses are conglomerate. So one group will have an insurance company, a bank, NBFCs, mutual funds running. Each one is regulated by separate entities and you don't even have one place where all the data is put together to see what the conglomerate-level view is. And that's the direction in which the world regulation is moving. So we should at least have one data management system in which all this data comes together and you're able to see, you know, who has exposure over whom and what is going on, in a more dynamic way and try to understand that. So these are some of the pieces that need to be figured out in terms of the legal framework that is present . And the way institutions make their regulations, the way they implement those, the way they issue orders. If you do these things right, then you can hope this machinery of institutions will produce the outcome that you want to produce. Because often we talk about this policy, that policy, but there is a full institution that is actually producing these bad policies . RBI board is is a very good example. It's not really an effective board. I mean you cannot say because it's not set up to be a professional board. It cannot by design do a proper oversight of RBI, which is such a powerful public institution. It needs to, its board needs to provide an oversight function. It's not designed to do that but look at the central board the way it is structured. People do other things. They come once in a while. Basically agenda setting is what matters in those board meetings. After that the game is gone. Sso, you need to fix those things. Then you can hope that these other things will happen. And government also needs to take a view that is financing of its deficit the end of the financial system. Is the financing of its development priorities the end of the financial system. Or should we move towards a much more market-oriented system in which these things are done. Government is a participant. It doesn’t get to command

Srinath: And of course we have a government which has got the, you know, political power especially in both the houses to pass this kind of legislation.

Suyash: If you have the statesmanship you have the power to exercise it. Otherwise interests will drive you from one side to another. Here, ideas can, if they bring them to the table and there's buy-in on the top, not many people can push back effectively. Not even their opposition can.

Srinath: Let's hope people in the government are done listening. And the good thing is that we have a government which has got the political power in both houses of parliament to be actually able to pass this kind of overarching legislation. And, um, I only hope that they are listening to this podcast and to you before we close our standard question to our guests is to tell our listeners if there is anything interesting that you've read lately, which you think would help them get a handle on the kinds of issues we've been talking about. 

Suyash: So a recent book that I read is by this ex deputy governor of Bank of England, Paul Tucker. He's written a book called unelected power. I strongly recommend that book because it goes to the first principles of political theory and public administration, and thinking about how regulatory and central banking powers should be structured and exercised in the context of a democracy. 

Srinath: Great, we will put a link to the book on the show notes and we will also put links to your own writings with which have been very useful in helping us think about this issue. Suyash, thanks so much for being here today and sharing your insights.

Suyash: Thank you Srinath, it was a pleasure talking to you.

(Outro) Srinath Raghavan: Thank you for listening to this episode of interpreting India. A podcast presented every two weeks by Carnegie India. I'm Srinath Raghavan. For more information about the podcast and the production team, you can follow us on social media and visit our webpage.