MAJOR

FINANCIAL
REFORMS
SINCE 1991
TABLE OF CONTENTS

2
 OVERVIEW OF INDIAN
ECONOMY (PRE 1991)
Since independence India followed the mixed economic system, by combining
the advantages of the market economic system (capitalist economy) with those
of the planned economic system (socialist economy).
But in reality, the public sector dominated the control and regulation of our
economy and private sector was ignored. This resulted into establishment of
various rules and laws which hampered the process of growth and development.
A few advantages of increased public role are as follows:-
• Achieve growth in savings
• Develop a diversified industrial sector
• Achieve food security through sustained expansion of agricultural output

3
WHY WERE THE REFORMS
OF 1991 REQUIRED?
The economic condition of India in the year 1991 was very miserable. It was due
to the cumulative effect of number of reasons. The following are the reasons:
• Poor performance of Public Sector: Except for few enterprises, the overall
performance was very disappointing
• Deficit in balance of payments: Even after imposing heavy tariffs and fixing
quotas, there was a sharp rise in imports.
• Inflationary pressure: Increased money supply and shortage of essential goods.
• Fall in foreign exchange reserves: Not enough reserves to finance imports for
more than 2 weeks and to pay the interest to international lenders.
• Huge burden of debts: Government had to borrow money from banks, public
and from international financial institutions.
• Inefficient Management

4
HELP FROM IMF AND
WORLD BANK
To manage the economic crisis of 1991, Indian government approached the World
Bank and the International Monetary Fund (IMF) and received $7 billion as loan.
For availing the loan, these international agencies expected India to liberalise and
open up the economy by:
• Removing restriction on Private sector;
• Reducing the role of government in many areas;
• Removing trade restrictions.

5
THE NEW
ECONOMIC
POLICY
1991
INTRODUCTION
The New Economic Policy (NEP) was announced in July 1991. It consisted of wide range
of economic reforms. The main aim of the policy was to create a more competitive
environment in the economy and remove the barriers to entry and growth of the firms.
Kinds of measures:
1. Stabilisation Measures: Short term measures which aim at-
• Correcting weaknesses of the balance of payments by maintaining sufficient
foreign exchange reserves.
• Controlling inflation by keeping the rising prices under control.
2. Structural Reform measures: Long term measures which aim at-
• Improving the efficiency of the economy;
• Increasing international competitiveness by removing the rigidities in
various segments of the Indian economy.

7
LIBERALIZATION
It refers to the process of making policies less constraining of economic activity and also
reduction of tariff or removal of non-tariff barriers.
Financia Sector Reforms
Financial sector includes financial institutions like commercial banks, investment banks,
stock exchange operations and foreign exchange market. In India, financial sector is
controlled by the RBI.
• Change in role of RBI
• Origin of private banks
• Increase in limit of Foreign investments

8
LIBERALIZATION STATS
• From 1992 to 2005, foreign investment increased 316.9%.
• India's gross domestic product (GDP) grew from $266 billion in 1991 to $2.3 trillion in
2018.
• As an effect of the liberalization in 1991, Poverty reduced from 36 percent in 1993-94 to
26.1 percent in 1999-00.
• The ratio of total exports of goods and services to GDP in India approximately doubled
from 7.3 percent in 1990 to 14 percent in 2000.
• This rise was less dramatic on the import side but was significant, from 9.9 percent in
1990 to 16.6 percent in 2000.
• The liberalization of Indian economy resulted in a large increase in inequality with
income share of Top 10% of the population increasing from 35% in 1991 to 57.1% in
2014. Likewise, the income share of Bottom 50% decreased from 20.1% in 1991 to
13.1% in 2014. It has also been criticised for decreasing rural living standards, rural
employment and an increase in farmer suicides.

9
PRIVATISATION
It refers to the transfer of ownership, management and control of public sector
enterprises to the entrepreneurs in the private sector.
It can be done in 2 ways:
1. Transfer of ownership and management of public sector companies from the
government to the Private Sector;
2. Privatisation of the public sector undertakings (PSU) by selling off part of the equity of
PSUs to the public. This process is known as disinvestment.
The purpose of privatisation was mainly to improve financial discipline and facilitate
modernisation and it was also believed that private capital and managerial capabilities
will help in improving performance of the PSUs.
As of February 2022, there are 11 Maharatnas, 13 Navratnas and 74 Miniratnas
companies.

10
PRIVATISATION STATS
• Since financial year 1991-92 to 2017-18 the Government of India sold public assets
totaling ₹3,47,439 Crore.
• In recent years, certain public sector undertakings performed reasonably well and paid
significant dividends to the government, whereas other PSU's such as Air India, BSNL,
and MTNL made huge losses, costing the taxpayer massive amounts of money.

Figure: Profit Margins of Manufacturing PSUs versus Private Manufacturing Firms

11
GLOBALISATION
Globalisation means integrating the national economy with the world economy through
removal of barriers on international trade and capital movements.
The NEP prepared a specified list of high technology and high investment priority
industries, in which automatic permission will be available for foreign direct investment
up to 51% of foreign equity.
To stimulate exports, discourage imports and raise the influx of foreign capital the
rupee was devalued by 20% in July 1991.
To integrate Indian economy with world, the Union Budget 1992-93 made Indian rupee
partially convertible and the rupee was made fully convertible in 1993-94 budget

12
GLOBALISATION STATS
• Since liberalization in the 1990s (precipitated by a balance of payment crisis), India's
exports have been consistently rising, covering 80.3% of its imports in 2002–03, up from
66.2% in 1990–91.
• India's economy has grown drastically since it integrated into the global economy in
1991. It has a drastic impact on India's economical condition. Its average annual rate has
grown from 3.5% (1990 –1980) to 7.7% (2002–2012).
• Economic growth has also led to increases in the per capita gross domestic product
(GDP), from $1,255 in 1978 to $3,452 in 2005, and finally to $8,358 in 2022 .

13
AN APPRAISAL OF LPG POLICIES
ARGUMENTS IN FAVOUR
• India’s GDP growth rate increased. During 1990-91
India’s GDP growth rate was only 1.1% but after
1991 reforms GDP growth rate increased year by
year and in 2015-16it was estimated to be 7.5% by
IMF.
• Since 1991, India has firmly established itself as a
lucrative foreign investment destination and FDI
equity inflows in India in 2019-20 (till August) stood
at US$ 19.33 billion
• Exports have increased and stood at USD 26.38
billion as of October, 2019.
• In 1991 the unemployment rate was high but after
India adopted new LPG policy more employment got
generated as new foreign companies came to India.
CRITICISM
• In 1991, agriculture provided employment to 72
percent of the population and contributed 29.02
percent of the GDP. Now the share of agriculture in
the GDP has gone down drastically to 18 percent.
• MNCs are competing local businesses and
companies which are facing problems due to
financial constraints, lack of advanced technology
and production inefficiencies
• Destruction of the environment through pollution
by emissions from manufacturing plants and
clearing of vegetation cover.
• LPG policies have lead to widening income gaps
withinthe country.
14
 DEBT
MARKET

1
5
MEANING OF DEBT MARKET
• Debt Market is where investors buy and sell debt securities, mostly in the form of bonds. Debt market in India is
one of the largest in Asia. Like all other countries, Indian debt market is also considered a useful substitute to
banking channels for finance.

• The debt market in India consists of mainly two categories the government securities or the G-Sec markets
comprising central government and state government securities, and the corporate bond market

16
WHY DO WE NEED A DEBT MARKET?

• Ensuring financial system stability:

A liquid corporate bond market can play a critical role because it supplements the banking system to meet the
requirements of the corporate sector for long-term capital investment and asset creation.
• Enabling meaningful coverage of real sector needs:
The financial sector in India is too small to cater to the needs of the real economy .The debt markets is required to
grow manifold to ensure that the financial sector becomes adequate for an economy as large and as ambitious as
India's.

17
 DEBT FACTS

• India recorded a Government Debt to GDP of 65.50 percent of the country's Gross Domestic Product in 2013.
Government Debt to GDP in India averaged 73.98 percent from 1991 until 2013, reaching an all time high of
84.30 percent in 2003 and a record low of 65.50 percent in 2013. Government Debt to GDP in India is reported
by the Ministry of Finance, Government of India.

18
WHY WERE REFORMS INTRODUCED IN DEBT MARKET

• In nominal terms, fiscal deficit of the central government has increased substantially since the early 1990s and
as a proportion of GDP it has hovered around 6 per cent. However, more importantly, the dependence of
government on market borrowings has increased sharply in this period. The outstanding stocks of both Centre
and State Government debt each increased by about 10 times since the initiation of reforms. From around 20
per cent in the early 1990s, share of net market borrowing in financing fiscal deficit of the central government
has increased to 80 per cent in recent years

• Growth was stimulated partially by expansionary policies that involved accumulation of a large external debt
and that ended in an economic crisis.
• In 1997, public issues of debt fell to Rs 29 billion, but with the collapse of the primary market for equity, the
share of debt in all public issues increased to 57 per cent. Meanwhile, private placement of debt (which is a
much bigger market than public issues) has grown very rapidly.

19
VARIOUS
REFORMS IN
GOVERNMENT
SECURITIES
MARKET

2
0
 ABOLITION OF TAX DEDUCTION AT SOURCE

• Tax deduction at source (TDS) used to be major impediment to the development of the government securities
market. This not only distorted the pricing mechanism, but also rendered trading in Government securities
cumbersome.
• The removal of TDS on Government securities was apparently a small but a major reform in removing pricing
distortions for Government securities.

21
 INTRODUCTION OF PRIMARY DEALERS SYSTEM

• Introduction of Primary Dealers (PDs) into the Government securities market brought a sea change in both the
primary market and secondary market. In order to reduce Bank’s role in the Primary Issuances the PDs were
encouraged to underwrite primary issuances through incentives such as underwriting commissions.

22
ENDING MONETIZATION
OF DEFICITS

• In 1994 and 1997, the Government of India and

the RBI signed agreements whereby the regime of
RBI financing the Government against the creation
of treasury bills by 22 the latter, was ended and
borrowing at market rates were to be followed.

23
REGULATORY ISSUES
• The regulatory gaps and overlaps are gradually
being sorted out through coordinated efforts from
all the regulators. The High-Level Committee (HLC)
on Capital Markets was formed to the allot the
powers, authorities and responsibilities of various
regulators.

• While the RBI promotes, recognises, encourages

and interacts closely with SROs such as Primary
Dealers Association and Fixed Income Money
Market and Derivatives Association for purposes
of evolving best practices

24
 CORPORATE DEBT MARKET

• This segment includes Commercial Papers (CP), Certificate of Deposits (CD), corporate debentures and bonds,
and the fixed income securities issued by financial institutions and local authorities.

• The corporate debt markets in India are dominated by the non-transparent private placements. Furthermore,
the private placement market is dominated by Financial Institutions, Banks and Public Sector Undertakings. In
order to bring transparency to this market, SEBI mandated that the corporate bonds should be traded on the
order matching screens of the stock exchanges. Alongside RBI issued instructions to the entities under its
regulatory jurisdiction restricting their investment in unlisted corporate bonds.

25
 CURRENT SCENARIO

• The G-Sec market is generally prevailing and dynamic part of the debt market. The key instruments that are
exchanged this market are fixed rate security, floating rate securities, zero coupon securities and swelling list
securities and depository bills. According to the RBI rules, banks need to put 23 per cent of their deposits in G-
Sec.

• The everyday turnovers of G-Sec market are around Rs.30, 000 to 50,000 crore.

26
IMPACT OF DEBT MARKET REFORMS

• Public sector no longer dominates the economic scene in the country as it used to.
• Share of public investment has dropped to 30% as compared to 50 even a decade and half ago.
• Current development strategies focuses mainly on involvement of private sectors in development of
infrastructure of heavy industries.
• Reduction in statutory liquidity ratio has helped the banks to lend more money to the private enterprises.

27
FOREIGN
EXCHANGE
MARKET
MANAGEMENT
ACT (FEMA)
1999
 BEFORE FEMA (1999)
FOREGIN EXCHANGE REGULATION ACT , 1973
• Conservation and proper utilisation of India foreign exchange.
• To issue guidelines to the foreign companies investing in India.
• Act came in when India’s ForEx Reserves were low at US $1325
million .
• Under FERA, 1973, it was required to take necessary permission
from the government in respect of transactions those involved
foreign exchange dealings.
• The Enforcement Directorate had unlimited powers to search, arrest
and seize.
• Any offence under the law was considered as Criminal offence .
• Also , companies like Coca-cola left Indian Market because of such
strict laws.

29
OJECTIVES OF FEMA
(1999)
• To facilitate the external trade and payments .
• To promote orderly development and maintenance of foreign
exchange market .
• Regulation of foreign capital in india .
• To remove imbalance of payment .
• Regulation of employment business and investment of non-
residents and payment of foreign payments .
• Offences under the law were considered as civil offences.
Provision of compounding is there.

30
MAIN PROVISIONS OF
FEMA, (1999)
• It gives powers to the Central Government to regulate the flow of
payments to and from a person situated outside the country.
• All financial transactions concerning foreign securities or exchange cannot
be carried out without the approval of FEMA. All transactions must be
carried out through “Authorised Persons.”
• In the general interest of the public, the Government of India can restrict
an authorized individual from carrying out foreign exchange deals within
the current account.
• Empowers RBI to place restrictions on transactions from capital Account
even if it is carried out via an authorized individual.
• Any person may sell or draw foreign exchange to or from an authorized
person if such sale is in Current Account (sec 5).
• Any person may sell or draw foreign exchange to or from an authorized
person for a capital transaction (sec 6) .

31
32
GOODS &
SERVICES TAX
2017
INTRODUCTION
• Officially known as The Constitution Act, 2016, this amendment introduced a
national Goods And Services Act (GST) in India from 1 July 2017. It was introduced as
the One Hundred and Twenty Second Amendment Bill of the Constitution Of India,

• The Goods And Services Tax (GST) is a Value added Tax (VAT) proposed to be a
comprehensive indirect tax levy on manufacture, sale and consumption of goods as
well as services at the national level.

• It replaces all indirect taxes levied on goods and services by the Indian Central and
state governments. It is aimed at being comprehensive for most goods and services.

34
BREAKDOWN OF GST
• Goods and services are divided into five different tax
slabs for collection of tax: 0%, 5%, 12%, 18% and
28%.
• However, petroleum products, alcoholic
drinks and electricity are not taxed under GST and
instead are taxed separately by the individual state
governments, as per the previous tax system.
• There is a special rate of 0.25% on rough precious
and semi-precious stones and 3% on gold.
• In addition a cess of 22% or other rates on top of 28%
GST applies on few items like aerated drinks, luxury
cars and tobacco products.
• Pre-GST, the statutory tax rate for most goods was
about 26.5%, Post-GST, most goods are in the 18% tax
range.

35
E-WAY BILL

An e-Way Bill is an electronic permit for shipping goods similar to a waybill. It was made
compulsory for inter-state transport of goods from 1 June 2018. It is required to be
generated for every inter-state movement of goods beyond 10 kilometres and the
threshold limit of ₹50,000
It is a paperless, technology solution and critical anti-evasion tool to check tax leakages
and clamping down on trade that currently happens on a cash basis. The pilot started
on 1 February 2018 but was withdrawn after glitches in the GST Network.
A unique e-Way Bill Number (EBN) is generated either by the supplier, recipient or the
transporter. The EBN can be a printout, SMS or written on invoice is valid. The GST/Tax
Officers tally the e-Way Bill listed goods with goods carried with it. The mechanism is
aimed at plugging loopholes like overloading, understating etc. Each e-way bill has to
be matched with a GST invoice.
It is a critical compliance-related GSTN project under the GST, with a capacity to process
75 lakh e-way bills per day.

36
FEATURES OF GST

1. Levy of Tax: The State GST (SGST) and Central GST (CGST) shall be
levied on all the transactions of goods and services, concurrently.
2. Utilization of Levy: Levies from State GST (SGST) & Central GST
(CGST) shall form part of State and the Centre respectively and no
cross-utilization shall be allowed.
3. Availability of Tax Credit: In respect of taxes paid on any supply of
goods or services or both used or intended to be used in the
course business.
4. Destination based Tax: The GST is a destination based tax on
consumption of Goods and Services. Hence the credit of SGST
shall be transferred to the Destination State in the form of
Integrated GST (IGST). IGST will be imposed on all Inter-State
Transactions.
5. Assessment : Registered person will be allowed himself to assess
the taxes payable under the GST Laws and furnish a return for
each Tax Period.
37
FEATURES OF GST

6. GSTIN or GST Identification Number Every registrants or dealers ( including Exporters and
Importers) shall be given a PAN based TIN number which shall be a common to the both
the State GST and Central GST.

7. Compensation to States The GST Laws provides for payment of compensation to the
States for loss of revenue, if any, arising out of implementing of the Goods and Services Tax
for a period of 5 years.

8. Anti-Profiteering Measures – It is expected the GST Laws will bring down the prices of
goods and services once implemented. To ensure the pass of such benefits to end users or
the customers, the government has put anti-profiteering measures.

38
GST- SUCCESS OR FAILIURE?

GST was launched over 5 years ago replacing almost all domestic indirect taxes. But was it a success?
GST has failed on two major counts. It has only widened the rift between the Centre and the states and it has
failed to achieve the ‘correct’ tax rates. Despite the pick-up in GST collections recently, the government and
the GST Council believe the current tax rates are much below the desired levels. The 15th Finance
Commission has in a report cited that against the revenue neutral rate of 15.5%, the average GST rates are
around 11.8%.
In the early years, the GST Council chopped and changed rates in response to the initial year chaos created by a
new tax system. Those rate cuts and exemptions are coming back to bite the government. This also created a
rift between the Centre and states. Many states have been struggling with their revenues, and they blame it
partly on having to give up their taxing rights under GST.
Many States demand the compensation (for the loss in revenue due to implementation of GST) that the Centre
gives to states (initially for the first five years) to extend for another three to five years, a demand the Centre
has not been too keen to yield to. The success (or failure) of GST now depends on the smooth resolution of
these issues.

39
 ESTIMATE V/S
ACTUAL GST
COLLECTED
The Union Budget for 2018-19 (the first
full year under GST) estimated receipts to
the tune of ₹7.43 lakh crore.

Actual collections were just 78% of this

amount. While the shortfall between
Budget Estimates and actual collections
reduced significantly in 2019-20.

In fact, GST collections in both 2020-21

and 2021-22 are still lower than the 2018-
19 numbers.

40
FINANCIAL
INCLUSION
FINANCIAL INCLUSION MEANING

• Financial inclusion is where individuals & businesses have access to

useful services that meet their needs
• It is defined as the availability & equality of opportunites to assess
financial services

42
PILLARS OF FINANCIAL
INCLUSION
• Bank a/c
• Insurance
• Payment & Remittance
• Financial advice
• Affordable credits
• Etc..

43
NEEDS OF FINANCIAL
INCLUSION
• Overall development of unprivileged
population
• For uplift of the poor & disadvantaged people
by providing them the modified financial
products & services
• Financial services are crucial to the functioning
of an economy, without them individuals with
money to save might have trouble finding
those who needs to borrow, and vice versa.

44
STEPS TAKEN BY GOVT
BEFORE 2014
1. No frill a/c
- The central bank introduced “no frills” in 2005 to provide
financial services to poor & promote FI.
- In this scheme many a/c’s were opened with a very minimum
maintained balance
- but this was replaced by basic saving deposit a/c in 2012.

2. Swabhiman
- Swabhiman is path-breaking initiative by Govt of India and
banks in state to cover the economic distance between rural and
urban India. It promises to bring basic banking services to all
unbanked villages in the country with population above 2000.
- It was launched by smt. Sonia Gandhi to extend all banking
services to all unbanked areas.

45
STEPS TAKEN AFTER ,2014

1. Spread of ATM
2013- 1,11,493
2017- 2,36,199

2. Ultra small branches

- RBI allowed to launch USB in rural centres. They act as bank agents.

3. PM JAN DHAN YOJNA

- Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for
Financial Inclusion to ensure access to financial services, namely, a
basic savings & deposit accounts, remittance, credit, insurance,
pension in an affordable manner. Under the scheme, a basic savings
bank deposit (BSBD) account can be opened in any bank branch or
Business Correspondent (Bank Mitra) outlet, by persons not having
any other account.
46
BENEFITS UNDER PMJDY

• One basic savings bank account is opened for unbanked person.

• There is no requirement to maintain any minimum balance in PMJDY
accounts.
• Interest is earned on the deposit in PMJDY accounts.
• Rupay Debit card is provided to PMJDY account holder.
• Accident Insurance Cover of Rs.1 lakh (enhanced to Rs. 2 lakh to new
PMJDY accounts opened after 28.8.2018) is available with RuPay card
issued to the PMJDY account holders.
• An overdraft (OD) facility up to Rs. 10,000 to eligible account holders
is available.
• PMJDY accounts are eligible for Direct Benefit Transfer (DBT), Pradhan
Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha
Bima Yojana (PMSBY), Atal Pension Yojana (APY), Micro Units
Development & Refinance Agency Bank (MUDRA) scheme.
47
48