• Indian Economic Growth and Development: Salient

features of underdeveloped economy–economic factors

and non–economic factors– poverty and inequality. Latest
trend in Indian Economic Planning. Macroeconomic
Overview – Fiscal and Monetary Policy –– Financial
Sector Performance and impending reforms.
• India has sustained rapid growth of GDP for most of the last two decades
leading to rising per capita incomes and a reduction in absolute poverty.
Per capita incomes (measured in US $) have doubled in 12 years
• But India has one third of all the people in the world living below the official
global poverty line. It has more poor people than the whole of sub-Saharan
Africa
• Per capita income is $1,877, placing India just inside the Middle Income
Country category
• India's per capita income is 1/20th that of the UK
• Life expectancy at birth is 69 years and India has 14% undernourished and
34.7% stunted children.
• The literacy rate for the population aged 15 years and above is only 74%
which is a lower figure compared to other lower middle income countries.
• Despite a strong attempt to become an open economy, exports of goods and
services from India account for only 15% of GDP although this will rise further
in the years ahead
• India runs persistent trade and fiscal deficits and has suffered from high
inflation in recent years
• India's growth rate has slowed and high inflation is a constraint on
competitiveness and growth.
• Investments by Indian businessmen abroad have overtaken foreign direct
Development path
• India has followed a different path of development from many other countries.
India went more quickly from agriculture to services that tend to be less tightly
regulated than heavy industry. That said there are some emerging manufacturing
giants in the Indian economy.

Supply-side factors supporting Indian growth and development

• A fast-growing population of working age. There are 700 million Indians under
the age of 35 and the demographics look good for Indian growth in the next twenty
years at least. India is India is experiencing demographic transition that has
increased the share of the working-age population from 58 percent to 64 percent
over the last two decades.
• India has a strong legal system and many English-language speakers – this
has been a key to attracting inward investment from companies such as those
specialising in IT out-sourcing.
• Wage costs are low in India and India has made strides in recent years in closing
some of the productivity gap between her and other countries at later stages of
development.
• India's economy has successfully developed highly advanced and attractive
clusters of businesses in the technology space – witness the rapid emergence of
Bangalore as a hub for global software businesses. External economies of
scale have deepened their competitive advantages in many related industries.
Growth and Development Limiters for India
• Despite optimism for India's prospects for economic
growth and development, there are a number of obstacles
which may yet see growth and development falter.
• Poor infrastructure - notably in transport and power
networks
• Low productivity and weak human capital. A high % of
workers are low-skilled and work in small businesses
• High inflation and a persistent trade deficit
• Low national savings as a share of GDP, low share of
capital investment
• Relatively closed economy - India is a net importer of
primary products
Indian Development – An Infrastructure Gap
• India is a good case study to use when discussing the problems that persist when
a country cannot rely on adequate critical infrastructure such as roads,
railways, power and basic sanitation. India wants to build $1 trillion worth of
infrastructure in the next five years but the government expects the private sector
to fund half of it – this is unlikely! Poor infrastructure hurts the Indian economy in
numerous ways:
• Causes higher energy costs and irregular energy supplies for nearly every
business and especially India emerging manufacturing sectors.
• It is more expensive to transport products across the country and it creates
delays at ports hamper export businesses and delays at airports which increases
the cost of international freight.
• It makes India less attractive to inward FDI
• It adds to the cost of living and limits the extent to which millions of India's
lowest income families can escape extreme poverty
• A creaking infrastructure damages the reputation and potential of
India's tourism industry
• Despite these growth constraints, India's expansion far exceeds that of the vast
majority of developed nations – to put this into some context, India is delivering
30 years of US economic advance every ten years!
Relative importance of services in India
• One of the key differences for India contrasted with
countries such as China, Japan and South Korea is that the
Indian economy is heavily reliant on service industries
especially in her export sector
• The country has a comparative advantage in many
service industries such as business software.
• One consequence of this structural difference in the
economy is that India has not yet seen the rapid
urbanization experienced in other nations; more than 60
per cent Indians still live in rural areas.
• Productivity growth in Indian agriculture has been fairly
low and this has limited the potential to release people from
the land to move into towns and cities and find work in
manufacturing sectors.
 GDP per Share of GDP Inflation Government
GDP
Year (in bil.
capita world growth rate debt
US$ PPP) (in US$ (GDP PPP
(real) (in Percent) (in % of GDP)
PPP) in %)

1980 382.0 557 2.89% 5.3% 11.3% n/a

1981 442.7 632 3.01% 6.0% 12.7% n/a

1982 486.5 680 3.11% 3.5% 7.7% n/a

1983 542.6 742 3.25% 7.3% 12.6% n/a

1984 583.3 781 3.23% 3.8% 6.5% n/a

1985 633.6 830 3.29% 5.3% 6.3% n/a

1986 677.3 869 3.33% 4.8% 8.9% n/a

1987 722.1 907 3.33% 4.0% 9.1% n/a

1988 819.3 1,007 3.49% 9.6% 7.2% n/a

1989 901.8 1,086 3.57% 5.9% 4.6% n/a

1990 986.9 1,164 3.62% 5.5% 11.2% n/a

1991 1,030.6 1,193 3.57% 1.1% 13.5% 75.3%

1992 1,111.8 1,261 3.38% 5.5% 9.9% 77.4%

1993 1,192.4 1,323 3.48% 4.8% 7.3% 77.0%

 GDP per Share of
GDP GDP Inflation Government
Year capita world
(in bil. growth rate debt
US$ PPP) (in US$ (GDP PPP
(real) (in Percent) (in % of GDP)
PPP) in %)

1994 1,298.8 1,413 3.60% 6.7% 10.3% 73.5%

1995 1,426.3 1,522 3.74% 7.6% 10.0% 69.7%

1996 1,562.1 1,636 3.87% 7.6% 9.4% 66.0%

1997 1,653.1 1,698 3.87% 4.1% 6.8% 67.8%

1998 1,774.4 1,789 4.00% 6.2% 13.1% 68.1%

1999 1,954.0 1,935 4.19% 8.5% 5.7% 70.0%

2000 2,077.9 2,018 4.16% 4.0% 5.6% 73.6%

2001 2,230.4 2,130 4.26% 4.9% 4.3% 78.7%

2002 2,353.1 2,210 4.30% 3.9% 4.0% 82.9%

2003 2,590.7 2,395 4.46% 7.9% 3.9% 84.2%

2004 2,870.8 2,612 4.58% 7.8% 3.8% 83.3%

2005 3,238.3 2,901 4.77% 9.3% 4.4% 80.9%

2006 3,647.0 3,218 4.95% 9.3% 6.7% 77.1%

2007 4,111.1 3,574 5.16% 9.8% 6.2% 74.0%

 GDP per Share of GDP Inflation Government
GDP
Year (in bil.
capita world growth rate debt
US$ PPP) (in US$ (GDP PPP
(real) (in Percent) (in % of GDP)
PPP) in %)

2008 4,354.8 3,731 5.21% 3.9% 9.1% 74.5%

2009 4,759.9 4,020 5.68% 8.5% 11.0% 72.5%

2010 5,160.8 4,181.2 5.76% 10.26% 10.52% 67.5%

2011 5,618.3 4,493.6 5.90% 6.63% 9.5% 69.6%

2012 6,153.1 4,861.1 6.15% 5.45% 10.0% 69.1%

2013 6,477.5 5,057.2 6.17% 6.38% 9.4% 68.5%

2014 6,781.0 5,233.8 6.22% 7.41% 5.8% 67.8%

2015 7,159.7 5,464.8 6.44% 7.99% 4.9% 69.9%

2016 7,735.0 5,839.8 6.70% 8.25% 4.5% 69.0%

2017 8,280.9 6,185.9 6.81% 7.04% 3.6% 69.8%

2018 8,998.6 6,652.7 6.99% 6.12% 3.4% 69.8%

2019 9,542.2 6,977.3 7.09% 4.18% 4.7% 69.8%

2020 8,681.3 6,283.5 6.66% -10.28% 4.9% 69.8%

The following points highlight the fourteen basic characteristics of
underdeveloped countries. Some of the characteristics are:
1. Low Level of Income
2. Mass Poverty
3. Lack of Capital Formation
4. Heavy Population Pressure 
5. Agricultural Backwardness 
6. Unemployment Problem 
7. Unexploited Natural Resources and Others.
8. Shortage of Technology and Skills,
9. Lack of Infrastructural Development
10.Lack of Industrialization
11.Lack of Proper Market
12.Mass Illiteracy
13. Poor Socio-Economic Condition
14. Inefficient Administrative Set Up
1. Low Level of Income:
• very low level of income in comparison to that of developed
countries.
• The per capita income are extremely low compared to the
developed countries.
• Moreover, inequality in the distribution of income along with this
low level of income worsens the situation in these economies.
2. Mass Poverty:
• The degree of poverty in these economies gradually increases
due to increase in its size of population, growing inequality in
income and increasing price level.
• Nearly 76.8 per cent of the world populations are living in those
underdeveloped or developing countries of the world, enjoying
only 15.6 per cent of total world GNP.’
• In these countries, majority of the population are living below
the poverty line.
3. Lack of Capital Formation:
• As the level of per capita income in these countries is very
low thus their volume and rate of savings are also very
poor. This has resulted lack of capital formation and which
is again responsible for low rate of investment in these
countries.
4. Heavy Population Pressure:
• The underdeveloped countries are also characterised by
heavy population pressure. The natural growth rate of
population in these countries is very high due to its
prevailing high birth rate and falling death rate. This
excessive population pressure has been creating the
problem of low standard of living and reduction in the
average size of holding.
5. Agricultural Backwardness:
• The underdeveloped countries are also suffering from
agricultural backwardness. Although being the most important
sector, agricultural sector in these countries remains totally
underdeveloped. But what is more peculiar is that these
countries are depending too much on this agricultural sector.
• Nearly 60 to 70 per cent of the total population of these
countries is depending on agriculture and about 30 to 40 per
cent of the total GNP of these countries is generated from
agricultural production.
• Agricultural productivity in these countries remained still very
poor in spite of its great importance.
• In these underdeveloped countries, agriculturists are still
following traditional methods and are applying modernised
techniques on a very limited scale.
6. Unemployment Problem:
• Excessive population pressure and lack of alternative
occupations have resulted in huge unemployment and
underemployment problem in these underdeveloped
countries.
• In the absence of growth of alternative occupations both
in the secondary and tertiary sector of these countries,
there is an increasing dependence on agricultural sector
leading to disguised unemployment or under-employment
in these economies to a large scale.
• Moreover, problem of educated unemployment in these
economies is also increasing gradually day by day due to
lack of industrial development.
7. Unexploited Natural Resources:
• under-developed countries are either suffering from
scarcity of raw materials or from un-exploited natural
resources of its own.
• the underdeveloped countries are having natural
resources like land, water, minerals, forest etc. in
sufficient quantity but these resources remain largely
under-utilized or even untapped due to various difficulties
such as
inaccessibility of the region,
shortage of capital,
lack of proper attention,
primitive technology,
transport bottlenecks and small extent of the market.
8. Shortage of Technology and Skills:
• Underdeveloped countries are facing low level of technology and
acute shortage of skilled manpower’s. The pace of economic
growth in these countries is very slow due to application of poor
technologies.
• But the application of modern sophisticated technology both in
agricultural and industrial sector is of utmost need in these
countries. This requires sufficient amount of capital, technological
advancement and training.
9. Lack of Infrastructural Development:
• Lack of infrastructural development is a common feature of
underdeveloped countries. In respect of transportation,
communication, generation and distribution of electricity, credit
facilities, social overheads etc. these countries are very much
backward than most of the developed countries. Thus due to
inadequate infrastructural facilities, the pace of economic
development in these countries are very slow.
10. Lack of Industrialization:
• Underdeveloped countries are characterized by lack of
industrial development. The pace of industrialisation in
these countries is very slow due to lack of capital
formation, paucity in the supply of machinery and tools
and also due to lack of initiative and enterprise on the part
of people of these countries.
• In spite of having huge potential for industrial
development, these countries could not develop the
industrial sector on a sound footing. Moreover, whatever
industrial development that has been achieved by these
countries are very much restricted only to some limited
areas.
11. Lack of Proper Market:
• Underdeveloped countries are also suffering from lack of
properly developed market. Whatever market these
countries have developed, these are suffering from
number of limitations viz. lack of market information, lack
of diversification, lack of proper relation or connection
between markets, lack of adequate demand etc.
12. Mass Illiteracy:
• Underdeveloped countries are mostly characterised by
the existence of mass illiteracy. Due to illiteracy the
people in these countries are very much superstitious and
conservative which is again responsible for lack of
initiative and enterprise on the part of people of these
countries.
13. Poor Socio-Economic Condition:
• Underdeveloped countries are also suffering from totally
poor socio-economic conditions. The path of economic
development in these countries is being obstructed by
various socio-economic factors like-joint family system,
universal marriage, costly social customs and the law of
inheritance.
14. Inefficient Administrative Set Up:
• Underdeveloped countries are also suffering from its
existing inefficient administrative set up. In the absence of
efficient and sound administrative set up, these countries
are suffering from lack of proper economic organisation,
lack of investments and lack of appropriate decisions
leading to total mismanagement of these economies.
RBI Monetary Policy 2020
• The monetary policy is a policy formulated by the central
bank, i.e., RBI (Reserve Bank of India) and relates to the
monetary matters of the country. The policy involves
measures taken to regulate the supply of money,
availability, and cost of credit in the economy.
• The policy also oversees distribution of credit among
users as well as the borrowing and lending rates of
interest. In a developing country like India, the monetary
policy is significant in the promotion of economic growth.
Objectives of Monetary Policy
• While the main objective of the monetary policy is economic growth as well
as price and exchange rate stability, there are other aspects that it can help
with as well.
• `Promotion of saving and investment: Since the monetary policy controls
the rate of interest and inflation within the country, it can impact the savings
and investment of the people. A higher rate of interest translates to a greater
chance of investment and savings, thereby, maintaining a healthy cash flow
within the economy.
• Controlling the imports and exports: By helping industries secure a loan
at a reduced rate of interest, monetary policy helps export-oriented units to
substitute imports and increase exports. This, in turn, helps improve the
condition of the balance of payments.
• Managing business cycles: The two main stages of a business cycle are
boom and depression. The monetary policy is the greatest tool using which
the boom and depression of business cycles can be controlled by managing
the credit to control the supply of money. The inflation in the market can be
controlled by reducing the supply of money. On the other hand, when the
money supply increases, the demand in the economy will also witness a rise.
• Regulation of aggregate demand: Since the monetary policy can control the demand in an
economy, it can be used by monetary authorities to maintain a balance between demand and
supply of goods and services. When credit is expanded and the rate of interest is reduced, it
allows more people to secure loans for the purchase of goods and services. This leads to the
rise in demand. On the other hand, when the authorities wish to reduce demand, they can
reduce credit and raise the interest rates.
• Generation of employment: As the monetary policy can reduce the interest rate, small and
medium enterprises (SMEs) can easily secure a loan for business expansion. This can lead
to greater employment opportunities.
• Helping with the development of infrastructure: The monetary policy allows concessional
funding for the development of infrastructure within the country.
• Allocating more credit for the priority segments: Under the monetary policy, additional
funds are allocated at lower rates of interest for the development of the priority sectors such
as small-scale industries, agriculture, underdeveloped sections of the society, etc.
• Managing and developing the banking sector: The entire banking industry is managed by
the Reserve Bank of India (RBI). While RBI aims to make banking facilities available far and
wide across the nation, it also instructs other banks using the monetary policy to establish
rural branches wherever necessary for agricultural development. Additionally, the government
has also set up regional rural banks and cooperative banks to help farmers receive the
financial aid they require in no time.
Flexible Inflation Targeting Framework (FITF)
• The Flexible Inflation Targeting Framework (FITF) was introduced in
India post the amendment of the Reserve Bank of India (RBI) Act,
1934 in 2016. In accordance with the RBI Act, the Government of India
sets the inflation target every 5 years after consultation with the RBI.
While the inflation target for the period between 5 August 2016 and 31
March 2021 has been determined to be 4% of the Consumer Price
Index (CPI), the Central Government has announced that the upper
tolerance limit for the same will be 6% and the lower tolerance limit
can be 2% for the same.
• In this framework, there are chances of not achieving the inflation
target fixed for a particular amount of time. This can happen when:
• The average inflation is greater than the upper tolerance level of the
inflation target as predetermined by the Central Government for 3
quarters in a row.
• The average inflation is less than the lower tolerance level of the
target inflation fixed by the Central Government beforehand for 3
consecutive quarters.
Monetary Policy Tools
• To control inflation, the Reserve Bank of India needs to decrease the supply of money
or increase cost of fund in order to keep the demand of goods and services in control.
Quantitative tools –
The tools applied by the policy that impact money supply in the entire economy,
including sectors such as manufacturing, agriculture, automobile, housing, etc.
Reserve Ratio: Banks are required to keep aside a set percentage of cash reserves or
RBI approved assets. Reserve ratio is of two types:
• Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash with
the RBI. The bank can neither lend it to anyone nor can it earn any interest rate or
profit on CRR.
• Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in
liquid assets such as gold or RBI approved securities such as government securities.
Banks are allowed to earn interest on these securities, however it is very low.
Open Market Operations (OMO):In order to control money supply, the RBI buys and
sells government securities in the open market. These operations conducted by the
Central Bank in the open market are referred to as Open Market Operations.
• When the RBI sells government securities, the liquidity is sucked from the market, and
the exact opposite happens when RBI buys securities. The latter is done to control
inflation. The objective of OMOs are to keep a check on temporary liquidity
mismatches in the market, owing to foreign capital flow.
Market Stabilisation Scheme (MSS) -
Policy Rates:
Bank rate – The interest rate at which RBI lends long term funds to banks is
referred to as the bank rate. However, presently RBI does not entirely control money
supply via the bank rate. It uses Liquidity Adjustment Facility (LAF) –repo rate as
one of the significant tools to establish control over money supply. Bank rate is used
to prescribe penalty to the bank if it does not maintain the prescribed SLR or CRR.
Liquidity Adjustment Facility (LAF) – RBI uses LAF as an instrument to adjust
liquidity and money supply. The following types of LAF are:
• Repo rate: Repo rate is the rate at which banks borrow from RBI on a short-
term basis against a repurchase agreement. Under this policy, banks are
required to provide government securities as collateral and later buy them back
after a pre-defined time.
• Reverse Repo rate: It is the reverse of repo rate, i.e., this is the rate RBI pays
to banks in order to keep additional funds in RBI. It is linked to repo rate in the
following way: Reverse Repo Rate = Repo Rate – 1
Marginal Standing Facility (MSF) Rate: MSF Rate is the penal rate at which the
Central Bank lends money to banks, over the rate available under the rep policy.
Banks availing MSF Rate can use a maximum of 1% of SLR securities. MSF Rate =
Repo Rate + 1
 Last Updated 15th Dec 2020
RBI Monetary Policy Today
RBI Monetary Policy Highlights       
The key indicators of RBI Monetary Policy along with their current rates in the table
given below:

Indicator Current Rate

CRR 3%

SLR 18.50%

Repo Rate 4.00%

Reverse Repo Rate 3.35%

FISCAL POLICY
• There are several component policies or a mix of policies that
contribute to the fiscal policy. These include subsidy, taxation,
welfare expenditure, etc. Also, there are a certain investment
and disinvestment policies and debt and surplus management
that contributes to fiscal policies.
• Objectives of a Fiscal Policy
In order to stabilize the pricing level in the economy.
The main objective is to achieve and maintain the level of full
employment in the country.
Also, to stabilize the growth rate in the economy.
Also, promote the economic development in a country.
In order to maintain the level of balance of payment in the
economy.
Fiscal Policy:
• A policy set by the finance ministry that deals with matters related to
government expenditure and revenues, is referred to as the fiscal
policy. Revenue matter include matters such as raising of loans, tax
policies, service charge, non-tax matters such as divestment, etc.
While expenditure matters include salaries, pensions, subsidies, funds
used for creating capital assets like bridges, roads, etc.
Demand Pull Inflation:
• This is a state when people have excess money to buy goods in the
market. RBI practises easier control on this as it can lead to a fall in
money supply in the economy, which in turn would mean a drop in the
prices.
Supply Side Inflation:
• Inflation in the economy owing to constraints in the supply side of
goods in the market. This cannot be controlled by RBI as it does not
control prices of commodities. The government plays an important role
in this case through fiscal policy.
Various Types of Fiscal Policies
• Contractionary Fiscal Policy
This involves cutting government spending or raising taxes. Thus, the tax revenue
generated is more than government spending. Also, it cuts on the aggregate
demand in the economy. So, the economic growth leading to the reduction in
inflationary pressures of the economy.

• Expansionary Fiscal Policy

This is generally used to give a boost to the economy. Thus, it speeds up the
growth rate of the economy. Also, during the recession period when the growth in
national income is not enough to maintain the current living of the population.
So, a tax cut and an increase in government spending would boost economic
growth and decrease the unemployment rates. Although this is not a sustainable
solution. Because this can lead to a budget deficit. Thus, the government should
use this with caution.

• Neutral Fiscal Policy

This policy implies a balance between government spending and Furthermore, it
means that tax revenue is fully used for government spending. Also, the overall
budget outcome will have a neutral effect on the level of economic activities.
There are major components to the fiscal policies and they are
• Expenditure Policy
Government expenditure includes capital expenditure and revenue expenditure.
Also, the government budget is the most important instrument that embodies
government expenditure policy. Furthermore, the budget is also for financing the
deficit. Thus, it fills the gap between income and government spending.

• Taxation Policy
The government generates its revenue by imposing both indirect taxes and direct
taxes. Thus, it is important for the government to follow a judicial system for taxation
and impose correct tax rates. This is because of two reasons. The higher the tax,
the reduction in the purchasing power of the people.
This will lead to a decrease in investment and production. Furthermore, the lower
tax will leave more money with people that lead to high spending and thus higher
inflation.

• Surplus and Debt Management

When the government receives more amount than it spends than it is known as
surplus. Also, when the spending is more than the income than it is known as a
deficit. In order to fund the deficits, the government needs to borrow from domestic
or foreign sources.
Financial Sector Performance and impending reforms

• The growth of financial sector in India at present is nearly

8.5% per year. The rise in the growth rate suggests the growth
of the economy. The financial policies and the monetary
policies are able to sustain a stable growth rate.
• The financial sector in India had an overall growth of 15%,
which has exhibited stability over the last few years although
several other markets across the Asian region were going
through a turmoil. The development of the system pertaining to
the financial sector was the key to the growth of the same. With
the opening of the financial market variety of products and
services were introduced to suit the need of the customer. The
Reserve Bank of India (RBI) played a dynamic role in the
growth of the financial sector of India.
The growth of financial sector in India was due to the
development in sectors:
Growth of the banking sector in India
• The banking system in India is the most extensive. The total asset
value of the entire banking sector in India is nearly US$ 270 billion.
The total deposits is nearly US$ 220 billion. Banking sector in India
has been transformed completely. Presently the latest inclusions
such as Internet banking and Core banking have made banking
operations more user friendly and easy.

Growth of the Capital Market in India:

• The ratio of the transaction was increased with the share ratio and
deposit system
• The removal of the pliable but ill-used forward trading mechanism
• The introduction of infotech systems in the National Stock Exchange
(NSE) in order to cater to the various investors in different locations
• Privatization of stock exchanges
Growth in the Insurance sector in India
• With the opening of the market, foreign and private Indian players are
keen to convert untapped market potential into opportunities by
providing tailor-made products.

• The insurance market is filled up with new players which has led to
the introduction of several innovative insurance based products,
value add-ons, and services. Many foreign companies have also
entered the arena such as Tokio Marine, Aviva, Allianz, Lombard
General, AMP, New York Life, Standard Life, AIG, and Sun Life.

• The competition among the companies has led to aggressive

marketing, and distribution techniques.

• The active part of the Insurance Regulatory and Development

Authority (IRDA) as a regulatory body has provided to the
development of the sector.
Growth of the Venture Capital market in India
• The venture capital sector in India is one of the most
active in the financial sector inspite of the hindrances by
the external set up.

• Presently in India there are around 34 national and 2

international SEBI registered venture capital funds
Financial and banking sector reforms are in following areas:
• Regulators
• The banking system
• Non-banking finance companies
• The capital market
• Mutual funds
• Overall approach to reforms
• Deregulation of banking system
• Capital market developments
• Consolidation imperative
Regulators
• The Finance Ministry constantly formulated major
strategies in the field of financial sector of the country. The
Government acknowledged the important role of
regulators. The Reserve Bank of India (RBI) has become
more independent. Securities and Exchange Board of
India (SEBI) and the Insurance Regulatory and
Development Authority (IRDA) became important
institutions. 
• Indian Banking Sector and Financial Reforms
As early as August 1991, the government selected a high
level Committee on the Financial System (the Narasimham
Committee) to look into all facets of the financial system
and make comprehensive recommendations for
improvements.
The major reforms relating to the banking system
were:

• Capital base of the banks were strengthened by

recapitalization, public equity issues and subordinated
debt.
• Prudential norms were introduced and progressively
tightened for income recognition, classification of assets,
provisioning of bad debts, marking to market of
investments.
• New private sector banks were licensed and branch
licensing restrictions were relaxed.
• Capital Market Reforms:
The SEBI was established with the vital objective, "to
protect the interest of investors in securities market and for
matters connected therewith or incidental thereto.“
• To control the business of the stock market and other
securities market.
• To promote and regulate the self-regulatory organizations.
• To forbid fraudulent and unfair trade practices in securities
market.
• To promote awareness among investors and training of
intermediaries about safety of market.
• To prohibit insider trading in securities market.
• To regulate huge acquisition of shares and takeover of
companies.
Opening the Capital Market to Foreign Investors
• Significant policy initiative in 1993 was the opening of the
capital market to foreign institutional investors (FIIs) and
allowing Indian companies to raise capital abroad by issue
of equity in the form of global depository receipts (GDRs).
• Modernization of Trading and Settlement Systems
• Mutual funds
Latest Reforms
• These two specific reforms are important as they will
strengthen our financial institutions and build a more
resilient system. One relates to creating a legal framework
for bilateral netting of qualified financial contracts while
the other relates to expanding the regulatory oversight of
RBI to cooperative banks.
- Bilateral netting is a useful concept in the financial sector
as it enables two parties in a bilateral financial contract to
offset claims against each other to determine a single net
payment obligation due from one party to other party in
the event of default. 
- Another important bill is the Banking Regulation
(Amendment) Bill, 2020 which was made essential due to
the recent instance of fraud in the case of PMC Bank. 
The new law makes a concerted attempt at bringing such
banks under the regulatory oversight of the RBI. The
central bank will now have the right to approve the
appointment of auditors and recommend removal of
auditors to these cooperative banks with the intention of
improving their governance and also timely identification of
any financial vulnerabilities to prevent a future crisis.