Double Financial Repression
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.
As a result, the competitivenessof Indian industry has been undermined. Calculations reveal that China carries about thrice as much coal freight per hour vis-à-vis India. Coal is transported in India at more than twice the cost vis-à-vis China, and it takes 1.3 times longer to do so. Unfortunately, subsidies can sometimes be regressive and suffer from leakages.
Basically, the government should club the bad banks and force them into “narrow banking” business and let them run down their assets and losses. Combined with branch, employee and cost rationalisation , narrow banking is likely to make unit branch economics better while keeping the asset profile healthier. It is the assets side of their balance sheet that is causing maximum stress requiring continuous capital inflows. Conditions that created these losses continue to exist even now and it is imprudent to shut our eyes to emergent losses from new loans made by the weaker banks. However, the liabilities side of their balance sheet is not as impaired or as value destructive.
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.
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 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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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.
- 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.
- The National Stock Exchange was established in 1994 as an automated electronic exchange.
- Conventionally, the industrial units were sanctioned term loan by the development banks and working capital by the commercial banks.
- For example, electricity subsidies by definition only help electrified households.
- It has also sought to control activities such as takeovers and insider trading which have implications for investor protection.
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.
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This will provide the fiscal space to insure against future shocks and also to move closer to the fiscal performance of its emerging market peers. Structural shifts in the inflationary process are underway due to lower oil prices, deceleration in agriculture prices and wages, and dramatically improved household inflation expectations. Going forward inflation is likely to remain in the 5-5.5 percent range, creating space for easing of monetary conditions. Overall Indradhanush is a big step forward in the Indian banking sector.
In 2018, the total fiscal deficit of the Indian government as a proportion of GDP was 2.4 percentage points higher than the average for Asian emerging markets. Double financial repression was pointed out in Economic Survey of FY15 by economist Arvind Subramanian. It referred to a phenomenon where the Indian banks suffered financial repression both on the assets and liabilities side. First, managing the scale of capital inflows through administrative restrictions is essential. Otherwise, it will risk market-determined interest rates being pushed too low relative to inflation. Also, the investors are realizing that inflating away debt is done to keep interest rates low while inflation is high.
New companies raising funds have typically relied on venture capital or private placement rather than public issues. Though, there are numerous reforms made in the regulatory framework and trading and settlement systems, the functioning of the capital market in the post-reform period has been heavily criticized. Investors, particularly small investors who entered the market in the early stages of liberalization, did not get good value of their investments. It was perceived that many dishonest companies took advantage of the exclusion of government control over issue prices to raise capital at inflated prices, at the expense of inexperienced investors. At global level, financial sector reforms have been driven by two apparently contrary forces.
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 IMF says 8.7 per cent, the World Bank says 9.4 per cent this year. In addition, the World Bank said in a recent report that the poverty ratio doubled between 2021 and 2022. About two-and-a-half million people have slipped below the poverty line and there are some protests even now but not at the scale we had earlier. So contraction of the economy and an increase in poverty levels are really longer-term challenges which have to be resolved. The government has to move from the IMF’s staff-level agreement to a full Extended Fund Facility programme as fast as possible.
India can balance the short-term imperative of boosting public investment to revitalize growth with the need to maintain fiscal discipline. Expenditure control, and expenditure switchingfrom consumption to investment,will be key. At the time of Independence, India’s rural financial system was marked by the domination of landlords, traders and moneylenders. From the 1950s, there were sporadic efforts to expand the reach of the institutional sector, particularly in the rural areas. Despite these measures, the predominantly private banking system failed to meet the credit needs of the rural areas. Presently, the mutual funds industry is controlled under the SEBI Regulations, 1996 and amendments thereto.
Financial experts suggested that there is a need for effective reforms to ensure that this remains competitive and attractive for investors from across the world. The economic reforms have preferred the need for changing the policy objective to promotion of industries and the formation of more integrated infrastructural facilities. Financial sector reforms are centre point of the economic liberalization that was introduced in India in mid-1991. Regulators and economic experts put more emphasis on banking reforms to enhance economy and enable people to access numerous facilities.
Why RBI’s monetary policy fails to control inflation?
The narrative on the Chinese debt trap is unfounded as it’s only ten per cent of the debt stock. We need to take advantage of China’s capital but we must look for it in the form of equity. The government has already introduced a number of fiscal measures to increase revenue and I think more are on the anvil in November when the next year’s budget is announced in Parliament.
All these imply that banks can give only 40 per cent of their loans in a competitive manner to the private sector. Though the government in the last five years has done well on ground of financial inclusion, a banking system in crisis doesn’t augur well for channelization of savings into investment. High dependence on the export market for growth, promoting high rate of savings and investments, high educational standards, assiduity and export-oriented policy.
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.
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.
A little bit of gold is left after the sale of some gold stocks that the Central bank had. So actually it’s about $300 million that exists, and that’s about a week’s high imports. Former Governor, Central Bank of Sri Lanka, Dr Indrajit Coomaraswamy analyses the island nation’s economic crisis https://1investing.in/ and the debt restructuring needed for IMF to release the $2.9 billion package. The session was moderated by Nirupama Subramanian, National Editor, Strategic Affairs. Besides providing financial backing, it acts as the implementing agency for the different government sponsored schemes.
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.
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.