Financial Sector Reforms in India-rameshwari
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Transcript of Financial Sector Reforms in India-rameshwari
8/8/2019 Financial Sector Reforms in India-rameshwari
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FINANCIAL SECTOR
REFORMS
THE ROAD AHEAD
By;
Rameshwari Kaul
FasE-09/11
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INTRODUCTION
Growth in Real GDP Averaged at 6% per Yearduring 1980-2005. GDP for 2009 is 7%.
India is in an enviable position among developingcountries
Fear of competition is receding ² confidenceamong Indian industries in their ability tocompete in the world market.
Success of IT is spilling over to manufacturing
India·s standing as an economic power in theSouth Asian region and the world has risen
None of this would have happened but forsystemic reforms initiated in 1991
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INTRODUCTION
Macroeconomic crisis of 1991
Approach to IMF and the World Bank
Systemic reforms Initiated
Reforms not reversed as they were after the 1966crisis
Collapse of the Soviet Union
China·s rapid growth after 1978
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Until the early nineties, corporate financial
management in India was in a bad state.
There were not many important financial
decisions to be made for the simple reason that
firms were given very little freedom in the choice
of key financial policies.
The government regulated the price at whichfirms could issue equity, the rate of interest
which they could offer on their bonds, and the
debt equity ratio that was permissible in
different industries.
Moreover, most of the debt and a significant part
of the equity was provided by public sector
institutions.
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PRESENT SITUA TION
finance managers today have to choose from an
array of complex financial instruments; they can
now price them more or less freely; and they have
access (albeit limited) to global capital markets.
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FIN A NCI AL SECTOR REFORMS
Financial sector reforms are at the centre stage of
the economic liberalization that was initiated in
India in mid 1991. This is partly because the
economic reform process itself took place amidsttwo serious crises involving the financial sector:
The balance of payments crisis that threatened
the international credibility of the country and
pushed it to the brink of default
And the grave threat of insolvency confronting
the banking system which had for years
concealed its problems with the help of defective
accounting policies.
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Moreover, many of the deeper rooted problems of the Indian economy in the early nineties werealso strongly related to the financial sector:
Large scale pre-emption of resources from thebanking system by the government to finance itsfiscal deficit.
Excessive structural and micro regulation that
inhibited financial innovation and increasedtransaction costs,
Relatively inadequate level of prudentialregulation in the financial sector.
Poorly developed debt and money markets.
Outdated (often primitive) technological andinstitutional structures that made the capitalmarkets and the rest of the financial systemhighly inefficient.
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FIN A NCI AL SECTOR REFORM
CAUSED:
Mixed picture in different segments Sea change compared to financial repression of
pre-reform era Interest rates largely deregulated Greater competition from private banks and foreign
banks Government pre-empts reduced significantly Establishment of autonomous Board of Financial
Supervision Residential norms on capital adequacy Improved debt recovery and restructuring mechanism Government SecuritiesMarket with primary dealers
as market matures Delivery Version Payment System Establishment of Clearing Corporation of India
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Improvements in reach and depth of banking sector,its balance sheet, capital structure, net profits andNPAs.
New financial products introduced Government Security Market has experienced
increases in market size, lower yields and longer
maturities Monetary Policy more independent and based on
indirect instruments Turnover in foreign exchange markets increased Despite achievements problems remain Risk Assessment mechanisms not up to standard
Not ready for Basel-II Public ownership a major problem Success in reforming of equity markets Creation of SEBI, National Stock Exchange Transactions costs fall and markets are integrated
nationally
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THE ROAD A HEAD
DEREGULA TION-Economic reforms have not onlyincreased growth prospects, but they have also mademarkets more competitive. This means that in orderto survive companies will need to invest continuouslyon a large scale.
GLOBALIZ A TION-Globalization of our financialmarkets has exposed issuers, investors andintermediaries to the higher standards of disclosureand corporate governance that prevail in moredeveloped capital markets.
INSTITUTION ALIZ A TION-Simultaneously, theincreasing institutionalization of the capital marketshas tremendously enhanced the disciplining power of the market. Large institutions (both domestic andforeign), in a sense, act as the gatekeepers to thecapital market
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T AX-REFORMS-Tax reforms coupled with
deregulation and competition have tilted the
balance away from black money transactions. It
is not often realized that when a company makes
profits in black money, it is cheating not only the
government, but also the minority shareholders.
Black money profits do not enter the books of
account of the company at all, but usually go into
the pockets of the promoters.
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POST-REFORM PERFORMA NCE
GDP GROW TH
Sources:MOF (2005a), Annex Table 1.6, * RBI, (2005c)
http://mospi.nic.in/t1.htm
Period/
Average
Annual
Growth Rate
(%)
1950-
1980
1980-
1990
1991-
1992
1992-
1997
1997-
20022002-03 2004-05
2005-06*
Projection
2005-06**
Apr-Sept
Real GDP 3.50 5.9 1.3 7.1 5.5 4.0 6.9 7.0-7.5 8.1
Population 2.2 2.1 2.0 1.9 1.7 1.7 1.6 1.6 1.6
Read GDP
per capita 1.3 3.8 -0.7 5.2 3.8 2.3 5.3 5.9 6.5
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PERCENT AGE OF POPULA TION
LIVIN
GIN P
O V ER
TY
RURAL URBAN NATIONAL
August 1951 ± November 1952 47.4 35.5 45.3
September 1961 ± July 1962 47.2 43.6 46.5
July 1973 ± June 1974 56.4 49.0 54.9
July 1977 ± June 1978 53.1 45.2 51.3
1983 45.7 40.8 44.5
July 1987 ± June 1988 39.1 38.2 38.9
July 1993 ± June 1994 37.3 32.4 36.0
July 1999 ± June 2000 27.1 23.6 26.1
Target for 2007
(Tenth Five-Year Plan)
21.1 15.1 19.3
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DOMESTIC S A VINGS
& INV ESTMENT
Puzzling dominance of direct saving in physical assets
Current account surplus for 3 years in a row
Unhealthy accumulation of reserves
1990-1991 1995-1996 2001-2002 2003-2004
Gross Domestic Savings 23.1 25.1 23.5 28.1
Public 1.1 2.4 -2.8 -0.3
Household: 19.3 18.2 22.8 24.3
Financial 8.3 8.9 11.2 11.4
Physical 11.0 9.3 11.6 12.9
Corporate 2.7 4.5 3.5 4.1TOTAL PRIVATE 22.0 22.7 26.3 28.4
Net Capital Inflow 3.2 1.7 -0.4 -1.8
Gross Domestic Investment (Adjusted for errors and omissions)
26.3
(0.1)
26.8
(0.2)
23.1
(-1.0)
26.3
(3.3)
Public 10.4 7.7 6.0 5.6
Household 11.2 9.3 12.6 12.9
Corporate 4.6 9.6 5.1 4.5
TOTAL PRIVATE 15.8 18.9 18.1 17.4
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ROAD A HEAD-CA PIT AL STRUCTURE
At the beginning of the reform process, the Indian
corporate sector found itself significantly over-
levered. This was because of several reasons:
Subsidized institutional finance was so attractive that
it made sense for companies to avail of as much of it
as they could get away with. This usually meant the
maximum debt-equity ratios laid down by the
government for various industries.
In a protected economy, operating (business) riskswere lower and companies could therefore afford to
take more risks on the financing side.
Most of the debt was institutional and could usually
be rescheduled at little cost.
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The reforms changed all of this. The corporate sector
was exposed to international competition andsubsidized finance gave way to a regime of high realinterest rates.
One of the first tasks for the Indian companies wassubstantial deleveraging.
Fortunately, a booming equity market and theappetite of foreign institutional investors for Indianpaper helped companies to accomplish this to a greatextent
Over the longer term, economic reforms have alsobeen reshaping the control dimension of the leverage
decision.
An equity issue clearly involves loss of control, and asdiscussed under the section on corporate governance,reforms have increased the power of the minorityshareholders.
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CONCLUSION
As one looks back at the last six years of reforms, it is
evident that India has undertaken financial sector reforms
at a leisurely pace and that there is a large unfinished
agenda of reforms in this sector .
Effective monetary management had enabled pricestability while ensuring availability of credit to support
investment demand and growth in the economy
Viewed in this light, the success in maintaining price and
financial stability is all the more creditworthy.