INDIAN FINANCIAL SYSTEM

SUBMITTED BY: SHUBHAM DEVNANI

ROLL NO.: DM21A61
SECTION: CORE FINANCE

Facilitated by reforms, financial markets have become freer and institutions more
independent operationally.”

-Dr. Y.V.Reddy, Governor, Reserve Bank of India

India's financial system is one of the most important aspects of our economic development.
This system manages the flow of money between the people of the country (household
savings) and those who can invest it wisely (investors/businessmen) and is in the interests of
both. Services provided to people by various financial institutions such as banks, insurance
companies, pensions, and funds make up the financial system.

The financial reforms of the 1990s began with the aim of eliminating the financial dictatorship
and creating an efficient, productive, and profitable financial sector. Economic reforms best
explain the effects of various economic practices since 1991, which led to significant changes
and liberalization of the Indian financial system.

Financial system during the pre – liberalized period

Since independence, India's financial system has followed an internal strategy in which the
state has played an important role for more than 40 years. In the 1950s, 1960s, and 1970s,
the financial system was overly controlled, rigid, and highly interventionist, which severely
limited entrepreneurship. Import substitution industrialization was seen as a major driver of
growth and was implemented through a very restrictive trade regime featuring import permits,
quantitative restrictions, and high tariffs.
Stage 1 (1947 – 1991)

• In 1991 India had to airlift its gold to pledge to loan

• In 1991 India faced a BOP (balance of payment) crisis India has no choice and has to
pledge 67 tons of gold to the union bank of Switzerland and bank of England to raise
a loan of 605 million dollars.

• The process of liberalization and globalization has been undertaken, especially in the
banking and financial sector.

• Now if I take about the Indian economy the Indian economy during the first three-
decade of independence grew at an average annual rate of 3.5%.

• In terms of per capita income, growth was 1.4% per annum

• Public sector became a consumer of community-saving

• In this period the government began borrowing not only to meet its revenue
expenditure but also a finance public sector investment

• The total expenditure of the central government increased from 16.23% of GDP to
19.26% during 1985-1990 this is mainly due to an increase in non-plan expenditure

• The Indian capital market was regulated by the capital issues act 1947. The ministry
of finance controlled the price and quantity of initial public offerings through the powers
of the controller of capital issues (CCI)

• 42.3 crore deficit in the first plan,1725 crore in the second plan,1941 crore deficit in the
third plan, surplus of 100 crores in the fourth plan in 1973-74 owing to a sudden
increase in invisible accounts receipts.
 Stage 2 (1991-2007)

• Balance of payment crisis in 191 an increased dependence of foreign oil imports

vulnerability to oil price fluctuations, declining from abroad, strong domestic demand,
determining the fiscal balance and raising interest payment on external debt
contributed to inflation rising to 13% and forex reserves declining to cover less than
two weeks of imports

• The government faced very difficulties in rolling over of short-term credit which was
around 5 billion US dollar

• Under these circumstances India had to approach the IMF (international monetary
fund) for a loan and pledge its gold reserves.

• The main focus of this time is structural reforms was on external sector reforms. Import
licenses for most items were abolished tariffs reduced, quantitative restrictions on
imports were completely phased out by 2001 and FDI (foreign direct investment) were
actively encouraged

• Structural reforms shifted to tax reform and further trade liberalization and financial
sector reforms, disinvestment, and privatization policies for attracting FDI.

• The new economic policy (1991) led to a major change in the regulatory framework of
the capital market in India the capital issues act 1947 was repealed and SEBI (security
exchange board of India)
Stage 3 (2007- 2022)

• In November 2009 India purchased 200 tons of gold valued at 31,380 crores from IMF
(international monetary fund)

• RBI brought nearly half of the gold sold by IMF under the latter’s limited gold sales
program

• After the purchase RBI has more gold than the European central bank and became
the 11th largest gold holder among the various central bank

• Foreign exchange reserves of the country in November 2009 were at 285.5 billion
dollars with foreign currency assets accounting for 268.3-billion-dollar, gold for 10.3
billion dollars

Conclusions

The case study describes the economic reform process that began in 1991. In response to
the 1991 tax-payment balance crisis, India embarked on an economic policy reform program.

The main purpose of India’s financial sector reform process was to eliminate previous financial
repression and create an efficient, productive, and profitable financial sector. It also provides
financial institutions with operational and functional autonomy, promotes financial stability, and
prepares a financial system to intensify international competition.

Case studies provide an opportunity to discuss various reforms undertaken in financial

markets and their impact on Indian financial markets