US-India Financial Regulatory Dialogue

Each year, the US Treasury and Indian Ministry of Finance co-host a meeting with financial regulators from both countries to discuss technical issues in banking, insurance, capital markets, and fintech.  It’s a great example of the strategic partnership between our two countries in in financial services and a vehicle for meaningful cooperation on important regulatory issues.

When they two sides meet later this year, they will also have to discuss the financial sector impacts of COVID-19. The post-pandemic economic recovery must be sustainable both financially and environmentally, with a focus on facilitating investments in productive, green infrastructure. The regulators from both countries can contribute meaningfully to this goal in their next discussions.

For example, India’s recent proposal to increase foreign direct investment in insurance creates a win-win scenario that facilitates greater investment of foreign capital in a critical market that, in turn, can invest that capital in sustainable domestic infrastructure, boosting Indian employment, economic development, and financial security in the process. But questions remain about new “safeguards” on that foreign investment that could undermine those wins.

US and Indian regulators should use their next dialogue to explore the rationale behind these safeguards and the market failures they are meant to address. They should also discuss the broader implications of India’s commitment to selling off a part of its systemically important insurer, LIC, and the government’s new localization mandate for reinsurance branches.

Similarly, In the rapidly developing digital payments space, regulators must strike a balance among consumer protection, financial stability, and innovation. Developments in finance, like financial services delivered through third-party apps, bring new challenges along with new benefits. In this context, new regulations that are not tailored to a specific risk will end up reducing competition, increasing costs, and stifling innovation in this critical sector.

Both sides would benefit from a discussion of new risks in the digital payment ecosystem and the mitigation strategies that ensure stability and protection without sacrificing efficiency and access. A regulatory discussion about non-personal data protection and taxation of digital services is also highly warranted.

Finally, in the most recent Union Budget, India announced steps to make it easier for citizens to recover their insured deposits in the case of a bank failure. While these reforms are welcome, India still lacks a comprehensive financial resolution and deposit insurance framework that will allow for the orderly dissolution and distribution of assets from failed financial institution. At their meeting, the regulators should discuss the concerns that stymied India’s efforts to pass a comprehensive resolution and deposit insurance bill in the past and commit to finding workable solutions to give such legislation a chance in the near future.

These are just some of the areas in which the United States and India can work together to improve the ease of doing business and strengthen the financial sector in both countries.  Addressing these issues at the next dialogue between US and Indian financial regulators will help ensure the financial sector can live up to the liberalizing goals embodied in India’s recent Union Budget.