India growth-strategy reform.ppt

8/10/2019 India growth-strategy reform.ppt

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Indias growth strategy and reform

Mritiunjoy Mohanty


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Assumptions

First, acute deficiency of material capital Second, speed of capital accumulation

constrained by low capacity to save Third, structural constraints on converting

savings into productive investment


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Assumptions

Fourth, agriculture defined by diminishingreturns to scale, industry by increasingreturns to scale - absorption of surpluslabour from agriculture

Fifth, primacy to market would lead to

excessive consumption by the rich andskewed investment priorities - not inkeeping long term requirements of the

economy


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Assumptions

Sixth, whereas inequality was bad any rapidtransformation of the ownership structureinimical to increase in output and savings.


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Assumptions

A supply side view of the world very little keynesian unemployment of

resources therefore state should aid in increasing and

mobilisation of savings or productiveaccumulation.


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Assumptions

Growth process sustainable with rapid public investment

public investment in three possible areas infrastructure agriculture industry


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Asumptions

1st FYP focussed on first two export pessimism and 2nd FYP closed economy and therefore role of

capital goods seector textile first strategy


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Crisis of 1991 Structural Adjustment

Industry deliscensing and deregulation Trade bringing tariff barriers Investment liberalisation of inward investment

Current a/c convertibility Capital controls Integration into the global economy


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Financial sector and its reforms as a

case At the time of independence India had a largely privately

owned and reasonably diversified banking system Intermediation focus rather narrow

Lack of a long term capital market Neglect of agriculture and rural areas An attempt to correct both structural and behavioural

lacunae in the system so as aid the process ofindustrialisation and growth

RBI sets up DFIs and SFCs as providers of long termcapital

Agricultures needs to met by cooperative banks


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UTI was set up to canalise resources from retail investorsto the capital market

Financial market architecture motivated by theunderstanding that intermediation requirement growth anddevelopment was best met by specialized financialintermediaries who performed specialized functions

To ensure that these specializations were adhered to,

financial intermediaries developed and promoted by theRBI had significant restrictions on both the asset andliabilities side of their balance sheets


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despite significant expansion, by end of 1960s, agriculturestill remained under funded and rural areas under banked

share of credit to industry almost doubled, agriculturereceived barely 2%

preference for large industry and business houses neglect of small scale industry and exports therefore decision to nationalise part of the banking sector

so that allocation of financial resources could take placeaccording to plan priorities


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in 1975 Regional Rural Banks (RRBs) were set up and in1980 NABARD formed as an apex bank for all cooperative banks in thecountry

following with the logic of specialization, the 1980s saw other DFIs

with specific remits being set up e.g. the EXIM Bank for exportfinancing, the Small Industries Development Bank of India (SIDBI)for small scale industries and the National Housing Bank (NHB) forhousing finance

long term finance came from DFIs and institutional investors orthrough the capital market. However price of capital issues wasregulated by the Controller of Capital Issues

along with nationalization was the restriction of new foreign entrantsinto financial markets.


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segmentation meant that competition was muted, with no price or non-price competition

the financial system had relatively high transaction costs

and political economy factors meant that asset quality wasnot a prime concern therefore expansion of access had come alongside poor

asset quality an increase in net bank lending to the government meant

that the asset side of banks

balance sheets tended to become increasingly illiquid impetus for change from Basel I norms and reforms

following macroeconomic crisis


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financial reform focused on the following: improving the asset quality on bank balance sheets increasing competition by removing regulatory barriers to

entry increasing product competition by removing restrictions on

asset and liability sides of financial intermediaries allowing financial intermediaries freedom to set their

prices putting in place a market for government securities improving the functioning of the call money market


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government security market important fiscal deficit to be financed by directly

borrowing from the market monetary policy conducted through open

market operations

large liquid bond market would help theRBI sterilise, if necessary, foreign exchangemovements


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reforms stood the earlier quantity driven model on its head de-segment markets and remove asset and liability

restriction of the balance sheets of financial intermediaries regulatory barriers to entry would be removed and markets

would determine prices Specialisation, if any, would be market driven rather than

by policy design

financial intermediaries were free to use economies ofscale and scope to achieve efficiency gains and improvemarket reach


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Continuity and Change

A few specs about the market today (2004) the government securities market dwarfs every other

market. Its turnover on average is more than 120 times the

BSE turnover and more than 50 times that of the NSE. second, over time the NSE has clearly grown inimportance vis--vis the BSE. Its turnover is almost twicethat of the BSE.

third, there is large and active call money market

finally, there is a large foreign exchange market as wellwith a rising daily turnover it increased from more than$5 billion to more than $7 billion between April 2003 andJuly 2004


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For the period March 2011 to March 2012 theaverage daily outright trading volume in the

secondary market for government bonds was 147 billion rupees. The average daily turnover in thecountrys two largest stock exchanges (BSE and

NSE) was 143 billion rupees.

[Calculations on the basis of data from RBI (2012:Table 5.1). Also see Chakrabarti and Mohanty(2009)]


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In the context of our discussion however there are two restrictions that are ofimportance.

First, there are still significant restrictions on foreign participation in the domesticgovernment bond market, which is the largest part of Indias financial markets, loweringsomewhat the risk of a sovereign-debt crisis and the economy less exposed to the whimsof international bond markets.

Second, domestic banks are disallowed from participating in international financialmarkets. But outside of the government bond market and the banking sector, Indiasfinancial markets are deeply influenced by international capital flows and this is

particularly true of the stock market (see Chandra (2008), Chakrabarti and Mohanty(2009) and Ghosh and Chandrasekhar (2009)).

The rupee is still not fully convertible on the capital account, to use the jargon of

economics. A fully convertible currency is one where there are no restrictions on the buying and selling of international financial assets and liabilities. There is one caveat todomestic banks not being allowed to acquire international assets and liabilities - they areallowed to lend, within limits, to majority-owned affiliates or wholly owned subsidiariesof Indian firms abroad (see Nayyar (2008: 125)).

Documents

India growth-strategy reform.ppt