Prime Minister Manmohan Singh has done well to bring financial sector reform back on the agenda in a speech at the World Economic Forum shindig in New Delhi on Sunday.

There is nothing exceptionable in what Singh said. In fact, it would not be unfair to say that he rolled out all the standard clichés: the need to develop the market for corporate bonds, the pension and insurance sectors, and the futures markets. The Reserve Bank made some moves towards a more open financial sector in its October monetary policy statement.

Illustration: Jayachandran / Mint

India needs a robust and well-capitalized financial sector if its national savings are to be put to productive use. Take infrastructure, for instance. Nobody can deny that India needs more roads, ports, power and airports. Minister for roads and highways Kamal Nath has called for a decade of infrastructure to follow the past decade of information technology.

Infrastructure projects are long-term and, hence, need long-term finance that is best provided by insurance and pension companies. A deep market for corporate bonds will both allow firms access to new sources of finance, allow fixed-income investors a new option to diversify risk and help develop a yield curve that will make monetary transmission more efficient.

The tricky part of financial sector reform is sequencing. What comes first? A headlong rush towards full capital account convertibility or a free-float rupee is uncalled for right now. Singh has done well to be more modest about what form financial reform should take now. In other words, he has not ignored the obvious lessons from the Western financial crisis.

Another related issue that Singh will have to tackle is the size of the fiscal deficit. Nearly one-fourth of the banking sector’s resources are compulsorily used to buy government bonds. The sheer size of the government’s bond issuance programme also distorts the money markets and the yield curve, an issue that cannot be separated from the broader goal of financial sector reform.

That said, there are clear reasons why new initiatives are needed to strengthen the financial sector. Raising the foreign investment levels on insurance and pension firms and pushing through changes to create a robust market for corporate bonds are, in our opinion, the most obvious first moves.

The debate on financial sector reforms became bitter and personal in 2007 and 2008. It is time for a more reasoned debate.

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