Mumbai: A high-level committee set up by the Planning Commission has suggested sweeping reforms in the country's financial sector, that it claims could push the country's economic growth by 1-2 percentage points and help sustain a double-digit growth rate.

The committee, headed by Raghuram Rajan, former chief economist of the International Monetary Fund, has suggested a loosening of government hold on the banking sector and other financial intermediaries,increased foreign participation in the bond market and allowing Indian insurance companies and provident funds to invest overseas.

While the panel has submitted a blueprint for sweeping and effective reform of the finance sector, it is not clear whether the government plans to pursue the recommendations.

The 13-member committee, which also includes ICICI Bank managing director and chief executive K V Kamath, will submit a final report, incorporating relevant suggestions from the public, later in June.

The Rajan panel has suggested a comprehensive approach to the finance sector, which includes discrete segments like banks, non-banking finance companies, capital markets and others.

The committee said it has taken the financial sector as a whole, studying linkages and influences, and suggested a radical revamp of  the way in which various finance businesses in India are conducted and regulated.

The committee has also drawn from an earlier report by a committee that looked into ways of making Mumbai an international financial centre.

The current turbulence in western financial markets and the decade-old Asian financial crisis prove that the financial sector needs more freedom and not less, the report says.

The threat to India's financial sector does not come from foreign capital, but from poor governance, murky bankruptcy laws and asset-liability mismatches, it adds.

The panel has suggested that reforms be undertaken in a comprehensive manner as piecemeal reforms could increase the potential for instability.

The report said that financial sector reforms needed to be accompanied by macroeconomic reforms to be effective and suggests that RBI should have a single formal objective: controlling inflation.

While the Rajan committee also said it is premature to move towards a single regulator, it has suggested that India create a statutory body called Financial Sector Oversight Agency, comprising chiefs of existing regulatory bodies that would be answerable to a Financial Development Council headed by the finance minister.

The Rajan committee also sought greater operating freedom for banks and suggested that the government relax its grip on public sector banks.

Besides, it has suggested opening doors to new smaller banks with a strong local area focus; disinvestment in small underperforming public sector banks; treating locally incorporated foreign banks on a par with Indian banks; liberalising takeovers by locally incorporated subsidiaries of foreign banks; and lifting restrictions on branch and automated teller machine (ATM) expansions.

The Rajan panel recommendations include:

• Allowing auction of securities with shorter period for listing
• Allowing exchange-traded interest rate, exchange rate derivatives
• Limiting role in currency markets to managing volatility
• Allowing more foreign investors in bond markets
• Letting Indian insurance companies, PFs invest overseas
• Sale of small underperforming public sector banks and roping in private strategic investors in larger ones
• Setting up holding companies, sell stake to other PSUs