India would do well to initiate small and steady reforms, but should not relax regulations just because an entity or activity is deemed important for the nation. The suggestion was given by Raghuram Rajan, the present governor of Reserve Bank of India on Friday.
Rajan addressed at the annual day function of the Foreign Exchange Dealers' Association of India (Fedai), “Instead of asking the regulators to relax norms, the government should provide direct subsidy to important activities like infrastructure.”
Rajan, who demits office on September 4, further said, “Observers may be impatient, but I think that steady and irreversible reform and ‘mini bangs’ rather than ‘big bang’ is what we need now.” He added, “Yesterday’s announcements were simply the next steps in a steady, measured liberalization.”
The RBI governor refused to relax norms around the infrastructure space, as too much of relaxation could raise the systemic risk. Banks have lobbied for special compensation for infrastructure projects.
During his tenure, the central bank has allowed various restructuring schemes, including one that matches debt-servicing with potential cash-flow of projects, lobby groups have demanded more.
“While the Reserve Bank of India (RBI) is a liberaliser, we have to be careful not to relax prudential regulations, simply because an entity or activity is deemed of national importance. A nationally important activity such as infrastructure may be very risky,” Rajan said.
In the long run, the activity itself could get damaged by regulatory dispensation, as too many infrastructure projects that do not have dollar earnings will be financed with dollar or yen loans and cannot repay, in which case stability would be compromised.