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Financial Reforms

Financial Reforms

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Published by vinni vone
deals with banking sector of india and its reforms,challenges,improvement
deals with banking sector of india and its reforms,challenges,improvement

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Published by: vinni vone on Nov 24, 2008
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02/01/2011

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T
he period immediately afterindependence posed a majorchallenge to the country. Due tocenturies of exploitation at thehands of foreign powers, there were veryhigh levels of deprivation in the economy— both social as well as economic. To take upthe Herculean task of rapid growth withsocio-economic justice, the countryadopted the system of planned economicdevelopment after independence. Due topaucity of economic resources andlimitations of availability of capital forinvestment, the government also came upwith the policy of setting up publicenterprises in almost every field.The fiscal activism adopted by the gov-ernment resulted in large doses of publicexpenditures for which not only therevenues of the government were utilized but the government also resorted to bor-rowing at concessional rates, which keptthe financial markets underdeveloped. Thegrowth of fiscal deficit also continuedunabated year after year. Complex struc-ture of interest rates was a resultant out-come of this system.Nationalisation of major commercial banks in the late sixties and early seventiesprovided the government with virtually thecomplete control over the direction of the bank credit. The emphasis was mainly oncontrol and regulation and the marketforces had very limited role to play.The economic system was working tothe satisfaction of the government. Thesocial indicators were gradually improvingand the number of people below povertyline also declined steadily. The onlyproblem area had been that the growth rateof the economy had been very low, and tilllate seventies, the growth rate of the GDPwas hovering around 3.5 per cent perannum. It was only during mid-eightiesthat the growth rate touched 5 percentagepoints.The situation became difficult by theeighties. Financial system was considerablystretched and artificially directed and con-cessional availability of credit with respectto certain sectors resulted in distorting theinterest rate mechanism. Lack of profes-sionalism and transparency in the func-tioning of the public sector banks led toincreasing burden of non-performance of their assets.Late eighties and early nineties werecharacterised by fluid economic situationin the country. War in the Middle East hadput tremendous pressure on the dwindlingforeign exchange reserves of the country.The country witnessed the worst shortagesof the petroleum products. High rate of inflation was another area of seriousconcern. Most of the economic ailmentshad resulted due to over regulation of theeconomy. The international lending andassisting agencies were ready to extendassistance but with the condition that thecountry went in for structural reforms,decontrols and deregulation, allowingincreased role for the market forces of demand and supply.The precarious economic conditionsleft the country with no alternative otherthan acceptance of the conditions forintroducing the reforms.
Post Reforms
R
ationalisation of the taxes hasalready taken place on the basis of the recommendations of RajaChalliah Committee Report duringmid-nineties. The government has beenable to tighten its fiscal managementthrough the FRBMA and the continuingincrease in the fiscal deficit has beencontained significantly. Reforms in theexternal sector management have yieldedresults in the form of increased foreigncapital inflows in terms of Foreign DirectInvestment (FDI), Foreign InstitutionalInvestment (FII) and the exchange rate hasalso represent true international value of 
Financial Sector Reforms in India
 ARTICLE
Reforms is an ongoingprocess and a fewreforms here and therekeep taking place inany economic systemas per the needs of time. But economicreforms in the Indianeconomy in true sensetook place only after the economic crisisduring 1991. Thoughthe reforms were wideranging andencompassed all thesectors of the economy,yet the focus of alleconomic reforms inthe country has beenon the financial andexternal sectors’overhauling. Theprocess of financialreforms is still on; onlytheir speed varies andthe focus keeps gettingshifted from one issueto the other. With theDraft Report of Raghuram RajanCommittee on FinancialSector Reforms alreadysubmitted, a lot morechanges are on theanvil.
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