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There is a better balance between the demand and the supply of essential goods. Financial sector is the mainstay of any economy and it contributes immensely in the mobilisation and distribution of resources. Financial sector reforms have long been viewed as significant part of the program for policy reform in developing nations. Earlier, it was thought that they were expected to increase the efficiency of resource mobilization and allocation in the real economy to generate higher rates of growth. Recently, they are also seen to be critical for macroeconomic stability.
The elements of the financial sector are Banks, Financial Institutions, Instruments and markets which mobilise the resources from the surplus sector and channelize the same to the different needy sectors in the economy. The process of accumulative capital growth through institutionalisation of savings and investment fosters economic growth. Reform of the financial sector was recognized, from the very beginning, as an integral part of the economic reforms initiated in 1991.
- The basis of liberalizing the banking system and encouraging competition among the three major participants’ viz.
- In the current scenario, the financial repression on liabilities side is lower while that on the assets side is more which has been further worsening due to the NPA mess of the banking system.
- Despite the fact that the banks provide both the term loan and the working capital loans, the industrial units prefer the development banks for the following reasons.
Fundamental objective of financial sector reforms in the 1990s was to create an effectual, competitive and steady that could contribute in greater measure to inspire progression. Capital market is defined as a financial market that works as a channel for demand and supply of debt and equity capital. It channels the money provided by savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees through a variety of financial instruments called securities. A capital market is not a compact unit, but a highly decentralized system made up of three major parts that include stock market, bond market, and money market.
Other issues include mergers of banks, the structure of non-banking financial companies and small- and medium-enterprises, holistic consolidation in banking and industrial structures. A competitive insurance industry providing diversified insurance products to fulfil differing customer needs, can help increase savings in this situation and allocate them efficiently. The insurance and pensions industry has long-term liabilities which it seeks to match by investing in long-term secure assets.
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Countries such as Germany, the UK, Italy, France and South Korea have complemented traditional fiscal expansions with “below the line” measures such as loans and guarantees to companies. The size of the Reserve Bank of India balance sheet as a percentage of nominal GDP is close to its 35-year average. Asian public debt as a proportion of GDP is expected to go up by nine percentage points in 2020. In 2020, the crisis-driven spending plan announced by the government so far is less than 1% of GDP. Back then, India’s effective fiscal stimulus over two years was a substantial 4.3% of gross domestic product .
Despite the fact that the banks provide both the term loan and the working capital loans, the industrial units prefer the development banks for the following reasons. Many reports signified that the initial steps have been taken in the form of allowing new banks to set up shop. Private Corporates, public sector entities and Non-Banking Finance Companies with a strong track record can now apply to set up new banks and the Reserve bank of India will consider these applications in the coming months.
Financial repression on the liability (i.e. deposits) side arises from high inflation. Higher inflation leads to a decline in the deposits with banks on account of a sharp reduction in households’ financial savings led by higher expenditure due to inflation and also due to low or negative real interest rates. One, the new developed world monetary system would create new problems for India. There is a dilemma whether India should continue with its current monetary policy while there is too much capital inflow along with the import of inflation. India has faced high inflationary pressures especially in food and related commodities since 2007. This has had a direct effect on real interest rates and hence reduction in household savings as people have to spend more on daily food items.
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The inflation has eased over the years and the liability side recession has also come down considerably. High inflation and reduced return on assets of banks has further strengthened the fact that rates maintained by banks did not give a positive rate of return on deposits to households. When the government is loaded with public money, it increases the money supply through public investment. This, coupled with the fiscal discipline practised by the economies, ensured that the public sector did not crowd out private savings and, in some cases, actually added to national savings. One sector with large a number of stalled projects in both public and private sectors is electricity. At the end of third quarter of this financial year, 80 projects were stalled in the electricity sector out of which 75 are in generation and 5 in distribution, and 54 of these 80 are in fact private.
Indradhanush, which is regarded a one of the big steps after the nationalisation of banks in 1970s, is a brainchild of PJ Nayak committee. The annual growth rate of real agricultural credit rose from about 2% in the 1990s to about 18% between 2001 and 2015. “Transaction demand for money is not always interest rate inelastic.” Discuss.
RBI fix AccountabilitySetup a monetary policy Committee to decide the monetary policy. This would arrest the wealth and market capitalisation destruction in PSU banks and set them on a healing path to modest success or extend their lifespan as opposed to assured destruction. Derive money multiplier when a part of money supply is exogenous and the other part is endogenous.
A key concern with these sectors however is that they are rather skill-intensive and do not match the skill profile of the Indian labour force. Econometric evidence suggests that the railways public investment multiplier (the effect of a Rs. 1 increase in public investment in the railwayson overall output) is around 5. India must also reverse the trajectory of recent years and move toward the golden ruleof eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.
The nationalisation of banks in 1969 was a watershed moment in the history of Indian banking. From July 19 of that year, 14 private banks were nationalised another six private financial repression upsc banks were nationalised in 1980. It is certain that one cannot locate a similar transformational moment in the banking policy of any country at any point of time in history.
Permission for new branches began to be given only if the RBI was satisfied that the banks concerned had a plan to adequately serve under banked areas and ensure actual credit flow to agriculture. In 2004, a policy to double the flow of agricultural credit within three years was announced. “If the interest elasticity of demand for money is low, the monetarists could predict the real GNP simply by the use of money supply.” Explain this statement. In an open economy with high capital mobility, monetary management can be a successful tool to increase output. There are enough excess reserves now which will also trigger growth in money supply, once activity picks up.
Examine the effects of public expenditure on the development process of an economy. The burden of tax depends upon the elasticity of demand and supply of a commodity or service. As the economy moves towards a normal situation, money multiplier will rise with credit growth. On the positive side, the queues for fuel and cooking gas have largely disappeared and the hour power outages are now down to just one or two hours. Affordability is a significant challenge with food price inflation running over 90 per cent and our overall inflation close to 70 per cent but the rate at which inflation has been rising is coming down.
Several Problems in the Capital Market
As the time passed, SEBI has implemented a modern regulatory framework with rules and regulations to control the behaviour of major market participants such as stock exchanges, brokers, merchant bankers, and mutual funds. It has also sought to control activities such as takeovers and insider trading which have implications for investor protection. The governing structure of stock exchanges has been changed to make the boards, of the exchanges more broad based and less dominated by brokers.
The addition of new banks will mean more competition for this sector in the country and it will lead to a development in services for the end customer. It is anticipated to increase financial enclosure as more and more people across the country will be able to access banking facilities. In reforms for the existing banks the public sector banks have been allowed to increase or decrease the authorised capital without the presence of an overall ceiling.
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As part of the reforms process, many private banks were granted licence to operate in India. This has resulted into a competitive environment in the banking industry which in turn has assisted in using the resources more competently. Conventionally, the industrial units were sanctioned term loan by the development banks and working capital by the commercial banks. The reform process has transformed the pattern of financing and now both the institutions are willing to extend long term loan as well as working capital loan. This has empowered the industrial units to avail credit facilities from a single institution.
The entry of foreign companies has helped in the start of international practices and systems. Some gaps however remain such as lack of an inter-bank interest rate benchmark, an active corporate debt market and a developed derivatives market. In general, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. As early as August 1991, the government selected a high level Committee on the Financial System to look into all facets of the financial system and make comprehensive recommendations for improvements.
Hence the government has to settle the asset side which is created out of its own policies. It also leads to economic growth but savings of public gets eroded. The state-owned banks were tightly regulated as financial stability was the cornerstone of overall macroeconomic stability. In a socialist economy, the government would mobilize its own resources to create the needed industries which would themselves end up being state-owned and operated. Extreme weather events like cyclones, heavy rainfall/floods, thunderstorms, hailstorms, and droughts often damage standing crops, causing supply shortages and spikes in vegetable prices in India…
Specifically, the prime goal in various NIEs was to raise gross savings rates. This was done by positive demographic dividend, macroeconomic stability, low inflation, lack of social safety nets and forced savings. The survey highlights that savings and growth are not only positively correlated but their positive correlation is even stronger than that between growth and investment. Giving examples of China and East Asia, it said these countries had high saving and investment rates that led to high growth. India must adhere to the medium-term fiscal deficit target of 3 percent of GDP.
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The principle of inflation targeting is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation. The President and https://1investing.in/ others have been clear that India is like family and China is a very good friend. One thing that has to be axiomatic in Sri Lanka’s foreign policy is that it has to be mindful of India’s strategic interests.
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