MARKET REFORMS

Approaching market reforms with the motive of inclusive growth presents challenges that are ubiquitous, but hitherto ignored. To promote financial security and better service delivery the modus operandi of the government procedures and regulations need to be altered in both the commodity and the financial markets. While regulatory methods seem to be archaic in the case of commodities, the financial segment of inclusive growth suffers from the lack of public –private partnerships (PPPs) and lesser investment options for the marginalized, and with lower returns.

That regulatory bodies need to loosen their grip on the markets and introduce competition to enable better delivery of services and efficiency in the markets is something that all policy makers agree upon. But how far would the subsidization, and various forms of it, go in ensuring access and availability continues to be a matter of debate. There cannot be a single clear cut solution to the challenges because reforms are generally a derivative of market driven changes aimed at opening up of markets and using competition to drive up efficiency. Regulatory flaws in the commodity markets have proved to be a bane for the ultimate goal of food security. There is a whole variety of regulatory bodies which are sector specific and others like CCI that cut across sectors that perpetuate a lack of unification, harmonization and streamlining across the powers that these regulatory bodies have and cross country there is no consensus whether the sector specific regulators are superior to something that cuts across sectors like the CCI. In fact, there is no real regulation per se. The APMC may cut across states, but most of the procurements are still not borne by the APMC. Moreover there is no single regulatory framework for agri-commodities and the only systems that bind the markets are the commission agent system and physical tender system. The obvious questions that arise henceforth, are, should the government at all be involved in the procurement procedure and should it be mandatory for the farmer to market his produce through the mandis? Furthermore, there is no standard for the taxation of the agricultural commodities and hence there is a need for bottom up approach to regulation to induce a bottom up approach to inclusion. The current systems were evolved for a deficit economy. But as we stand today, with our surplus economy, the distribution channels need to be revisited to ensure food security and at each step in the value chain there is a requirement for increased efficiency which also makes a case for liberalized markets for agricultural produce. Better availability of markets means that the farmers today can earn more by approaching the markets without PDS. So does that imply PDS should be done away with? Or should it stand as a backup for the farmer? In that case, what happens to the MSP? As for consumer side reforms, through the history of PDS, we know where the pockets of inefficiencies lie. Free markets have as much to do with the demand side issues as with the supply side problems and certain areas with no markets have to be brought under the ambit to ensure availability of food grains in all parts of the country.

The financial products available in the markets also make a huge difference and loans and saving facilities are not just the only tools to evade financial exclusion. While savings and credit play a major role in lifting the poor above the poverty line, it is tools like pensions and insurance that help maintain a standard of living and provide an individual an opportunity to take risks. It is important to have that cushion, provided by pensions and insurance, to absorb financial shocks to stop them from slipping back into poverty. From an investment perspective, it is essential to have equity linked insurance policies that provide an overall higher interest rate than the inflation levels. The retirement funds form an important source of capital that the economy can make use of. The objective of the whole exercise must not be to link the individual with the markets directly by promoting trading, rather, to indirectly promote investments in the markets through insurance and pensions which could be equity linked. As things stand, most of the pension funds are invested in public sector, thereby denying the investors the opportunity of earning maximum returns through investment in private equity. Also as any sort of growth demands investment in physical infrastructure, we need to increase the domestic capital investment in such projects. On the policy front, to achieve inclusive growth it is necessary to incentivize insurance companies and pension funds to operate in the rural areas and provide customized products for investors who can invest only in small amounts. So while on one hand there is a case for the involvement of the private sector in the pensions and insurance, there is also a need for careful regulation to ensure that product pricing, risk assessment and investments are up to the mark. Having said that, it is the imperative of the government to ensure that private investments are not stifled out due to over regulation. Since innovation is central to creating the right product, the growth of these sectors and the influence in inclusion will depend a lot on our ability to support innovation but without increasing systemic risk. Financial literacy, and more so, financial education holds the key to make people aware of the various investment options and secure them against making bad choices due to growing sophistication in the financial markets. So we have a ready structure for financial inclusion wherein the building blocks and the core essentials are in place. What we need is to build on these and use the vibrant market and technology to good effect in ensuring better outreach of the financial services. Innovation and public-private partnerships along with appropriate regulations will go a long way in ensuring the same.