Indian Economy, 5th edition (54 page)
Read Indian Economy, 5th edition Online
Authors: Ramesh Singh
G-20 Agenda in 2012
Mexico has taken over Presidency of the G-20 after the
Cannes Summit
and released a strategic vision of the G- 20 agenda spelling out the following priorities:
I.
Economic stabilization and structural reforms as foundation of growth and
employment.
II.
Strengthening the financial system and
fostering financial inclusion to promote growth.
III.
Improving the international financial architecture in an interconnected world.
IV.
Enhancing food security and addressing commodity price volatility.
V.
Promoting sustainable development and green growth in the fight against climate change.
PROSPECTS FOR INDIA
India has entered a ‘critical decade’
28
. It has emerged as a large and systemically important economy on the global stage. It enjoys the unique advantage of having many economic indicators in its favour, particularly a large domestic market, robust investment-to-GDP ratio, and demographic advantage. However, all of these will need to be leveraged to get the full advantage out of them. Undoubtedly, this requires India to address its internal challenges, which include the long-standing problem of poverty and the development of its social and physical infrastructure.
India, given its size and its profile in the global economy, will inevitably need to play an active role at global level, not just in debates about how to resolve the continuing crisis and prevent the recurrence of similar crises in the future, but in influencing the rules for the global economy on overarching macroeconomic issues such as trade, capital flows, financial regulation, climate change, and governance of global financial institutions.
On the front of engaging the global economy, at this juncture, India may be advised to take a
passive stance
in the current global debate and just wait for the period of crisis to fade out. This looks the easy choice, too. But this option is no longer realistically feasible due to two reasons:
(i)
India is already too much a part of the global economy and polity; and
(ii)
developments in the world will affect India deeply and what India does will affect the world.
Therefore, there seems a need for India to engage with the world in terms of action and ideas. A majority of experts all over the world, including the policy-makers in India and its economic think-tank, seem to agree on this stance being taken by India while engaging the new global economic order. To conclude briefly, we may say that India is destined to affect/write the emerging global economic order – naturally, according to its future economic determinants and the world community at large.
1.
Economic Survey 2011-12,
op. cit., p. 337.
2.
This is the way the
Ministry of Finance
(GoI) looks upon the area which has been amply visible in views of the various Central Ministries, especially the
Ministry of Commerce,
the
RBI
and the annual publication the
Economic Survey 2011-12.
3.
Based on the data released by the
World Economic Outlook (OEO),
an annual publication of the IMF, Jan. 2012 and the
Principal Global Indicators,
an annual publication of the Organisation for Economic Cooperation and Development (OECD), Paris, Jan. 2012.
4.
We see it happening, especially, when the US Federal Reserve goes for revisions in its monetary policy stance – the central banks of almost whole world start re-adusting their own monetary policies (in this way the domestic concerns of these economies have suffered throught 2010 and 2011).
5.
Employment Outlook-2011,
an annual publication of the OECD, Paris, Jan. 2012.
6.
Analyses regarding the ensuing Eurozone Crisis is based on various news reportings and news analyses which appeared around the world including India – the present one is basically modelled on the views and stances of the
Ministry of Finance, Ministry of Commerce, Reserve Bank of India,
and the
Economic Survey 2011-12,
GoI, N. Delhi, ranging between May 2010 and May 2012.
7.
Economic Survey 2011-12,
op. cit., based on the
World Economic Outlook
of the IMF and the reports of the
International Finance Corporation
(a World Bank group of financial institution).
8.
Based on the decadal data of the WEO, quoted by the Economic Survey 2011-12, op. cit.
9.
United Nations Conference on Trade and Development (UNCTAD) Report-2011,
as quoted in the Economic Survey 2011-12, op. cit.
10.
World Trade Organisation,
as quoted in the Economic Survey 2011-12, op. cit.
11.
Computed from the
World Bank
database as quoted in the Economic Survey 2011-12, op. cit.
12.
Based on the data released by the
United Nations Population Division
in Jan. 2012 as quoted by the
Economic Survey 2011-12,
op. cit.
13.
WEO,
IMF database, September 2011 and
Fiscal Monitor Update,
IMF,
Jan. 24 2012 – as quoted in the Economic Survey 2011-12, op. cit.
14.
As on Dec. 31, 2012,
Economic Survey 2012-13,
MoF, GoI, N. Delhi, see pp. 137-139 for details.
15.
A. M. Spence (2011),
‘The Impact of Globalization on Income and Employment: The Downside of Integrating Markets’
Foreign Affairs,
Vol. 90., p. 29.
16.
R. Zagha,
‘Global Imbalance: Policies, Structure and Finance’, in S. Kochhar (ed.)
Policymaking for Indian Planning, 2012,
Academic Foundation, N. Delhi.
17.
Economic Survey 2011-12,
op. cit., p. 346.
18.
As discussed by the
Economic Survey 2011-12,
op. cit., p. 349.
19.
These facts and the concerns of the GoI was at first enumerated by the India’s PM in one of his crucial interactions with the Confederation Indian Industry (CII) mid-Feb. 2012.
20.
The GoI has also been not adamant on the stand as whether the Commodity Market Exchages support the market, producers and the consumers by a rational price search or are the cause of price rises as the participants start speculating an imminent price rise in coming times if there is a projection of lower productions by the government! We have seen the GoI banning trade in certain commodities at one time and allowing it at other!
21.
A
minimalist state
(also called
‘night watchman state’
) is variously defined – in the strictest sense, it is a form of government in political philosophy where the state’s only legitimate function is the protection of individuals from aggression, theft, breach of contract, and fraud, and the only legitimate governmental institutions are the military, police, and courts, fire departments, prisons, the executive, and legislatures. The role of state regarding ‘social sector’ (such as education, health, etc. which expanded after the Keynesian denial of Adma Smith caught fancy in the post-Great Depression era) is not considered suitable for such states.
22.
Economic Survey 2011-12,
op. cit., p. 350, Table 14.8
23.
Economic Survey 2011-12,
op. cit., p. 104-129.
24.
Economic Survey 2011-12,
op. cit., p. 134.
25.
As it is visibly clear from the ensuing movements led by the
Civil Society
vibrating basically on the rational base provided by the Right to Information – has been duely highlighted by the
Economic Survey 2011-12,
too in the Chapter- 2, op. cit. p.30.
26.
Discussed at different fora by the central banks, trade groupings of the world and the experts since 2008 – also concisely highlighted by the
Economic Survey 2011-12,
op. cit., pp. 337-57.
27.
‘
Financial Stability Board (FSB)
came up in 2009 originating from the erstwhile existing global body, the Financial Stability Forum (FSF). The FSF was established by the G-7 finance ministers and central bank governors in 1999 to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. It decided at its Plenary Session in London on 11-12 March 2009 to broaden its membership and invite as new members the G20 countries that were not initially in the FSF. These included Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. In order to mark a change and convey that the FSF would play a more prominent role in this direction in the future, the FSF was relaunched as the Financial Stability Board (FSB) on 2 April 2009, with an expanded membership and broadened mandate to promote financial stability. The current FSB comprises national financial authorities (central banks, supervisory authorities, and finance ministries) from the G20 countries, as well as international financial institutions, international regulatory and supervisory groupings, committees of central bank experts, and the European Central Bank’, as described in the
Economic Survey 2010-11,
MoF, GoI, N. Delhi, p. 125.
28.
Economic Survey 2011-12
seems concluding its views on the ‘India Story’ by using the phrase ‘critical decade’ from the very title of a recently published book by
Rajeev Malhotra
but, without refering the author’s name. The book is – Rajeev Malhotra (Edited),
A Critical Decade: Policies for India’s Development,
Oxford University Press, N. Delhi, India, released on
1st March 2012.
The editor, Rajeev Malhotra is, the erstwhlie
Economic Adviser,
Office of the Finance Minister, GoI and has been the principal author of the
first
National Human Development Report 2001
(published jointly by the Planning Commission, GoI and the Oxford University Press, 2002). Contributors to this edited volume are senior-level economists/advisers in the GoI. The book has ‘Foreword’ by
Kaushik Basu, the Chief Economic Adviser, Ministry of Finance, who led the team which compiles the annual publication of the Ministry, the Economic Survey.
Introduction
The market of an economy where funds are transacted between the fund-surplus and fund-scarce individuals and groups is known as the financial market
(definition)
1
.
The basis of transaction is either
interest
or
dividend
. This market might have its organised (institutionalised) as well as non-organised (unregulated/non-institutionalised) segments in an economy and may serve the purpose of supply of funds for the
short-term
or the
long-term
periods.
Financial markets in every economy are having two separate segments today, one catering to the requirements of the
short-term funds
and the other to the requirements of the
long-term
funds
2
. The short-term financial market is known as the
money market
while the long-term financial market is known as the
capital market.
The money market fulfills the requirements of funds for the period upto 364 days (
i.e. short term
) while the capital market does the same for the period above 364 days (
i.e., long term
)
3
. The structure of the Indian Financial Market today may be seen in the following way:
A.
Indian Money Market
B.
Indian Capital Market
A. Indian Money Market
India money market is among the emerging money markets of the world today but yet undeveloped in comparison to the markets of the developed economies
4
. The organised and unorganised segments of the market are co-existing today side by side, though the unorganised segment is not totally unregulated in India. The structure and the components of the Indian money market are as given.
5
1. Organised Indian Money Market
Present since independence, its real development took place after the year 1985. Today there are eight instruments or components of the Indian money market especially designed to fulfill the short-term fund requirements of the different categories of the individuals, institutions or the firms and companies:
(i)
Treasury Bills
(ii)
Call Money Market
(iii)
Certificate of Deposit
(iv)
Commercial Bills
(v)
Commercial Papers
(vi)
Mutual Funds
(vii)
Repo and Reverse Repo Markets.
(viii)
Cash Management Bill
2. Unorganised Indian Money Market
This is comparatively an older money market of India still perpetuating even after the expansion of its organised form. The unorganised money market is called ‘unorganised’ as there is no systematic regulatory framework for them. Still, there is a nominal legal provision which gives them a bit of official form. As for example, the RBI has fixed the highest rate of interest charged by the indigenous bankers today at
33.33 per cent
per annum which they follow while lending at least on paper with revenue stamps affixed (though, everybody knows the real interest charges which are at times, higher and highly exploitative)
6
. The lender uses the paper in courts in the case of defaulter. As the unorganised segment of the money market has access to the areas where the organised segment has still not reached, its function is considered important for the proper functioning of the economy in India. They are highly active at the major ports of India, the stone cutting and polishing centres in Gujarat today. The major components of the unorganised money market in India are as given below:
(i)
The
hundis
which are there in indigenous bill markets.
(ii)
The
Shroffs
in Gujarat and
Kayas Marwaris
and
Pathans
in India.
(iii)
The indigenous bankers specially in Mumbai and Ahmedabad.
(iv)
The small/big
businessmen
and
money - lenders
(specially in rural areas and small towns).
As money market facilitates the availability of the working capital for the business and commercial houses it is also known as the
working capital market.
Money market in India is primarily regulated by the RBI except the Mutual Funds which have dual regulators—the RBI and the SEBI. Money market in India still has enough scope for expansion and a lesson might be taken from the other developed economies.
B. Indian Capital Market
Indian capital market which facilitates the long-term requirements of funds in the economy has seen accelerated expansion in the past six decades
7
. The structure and components of the market can be understood in the following way:
1. Financial Institutions
This segment of the capital market was developed by the Government of India to fulfill the capital requirements of the upcoming industries in the country better known as the business of
‘project financing’
8
. In the due process of time we see emergence of four categories of Financial Institutions (FIs) in India:
(i)
All India Financial Institutions (AIFIs) such as the IFCI, ICICI, IDBI, SIDBI and IIBI, etc.
Presently, there are only four financial institutions which are regulated by the RBI as the AIFIs – EXIM Bank, NABARD, National Housing Bank (NHB), and the Small Industries Development Bank of India (SIDBI).
9
(ii)
Specialised Financial Institutions (SFIs) such as the RCTC and TFCI.
(iii)
Investment Institutions (IIs) such as the LIC, GIC and the UTI.
(iv)
State Level Financial Institutions (SLFIs) with its two variants, the SFCs and the SIDCs.
2. Banking Industry
With the passage of time, there developed a number of government and privately owned banks in the country, and became the mainstay of the capital market by the 1980s.
3. Security Market
After the government’s attempts to formally organise the security and stock market of India, the segment has seen accelerated expansion. Today, it is counted among the most vibrant share markets of the world and has challenged the monopoly of the banks in the capital market of the country
9
.
Financial Regulators
At present Indian financial market has a number of regulators, precisely
eleven
—
RBI, SEBI, FMC, NABARD, IRDA, SIDBI, NHB, SFCs, LDBI, CLB and Registrar of Cooperative Societies.
The Narasimhan Committee on Financial System (1991) has made a strong case for a single requlator for banks, financial institutions and the non-banking financial institutions in India.
Meanwhile, the
Justice B N Srikrishna
headed Financial Sector Legislative Reforms Commission (FSLRC) handed over its report
end-March 2013
– it was set up March 2011 for examining the regulatory structure and the laws governing the financial sector. The 10-member committee had a broad
mandate
covering all financial services as well as everything currently overseen by any financial regulator. Broadly, the commission has recommended what can be called a changeover from an areabased division of regulators to a task-based division. Major highlights of the recommendations are as follows:
i.
Today, each agency like the Sebi or the IRDA or the FMC looks after one type of financial service or one area – this would be replaced by a horizontal structure whereby the basic regulatory and monitoring functions of all areas would be done by a Unified Financial Agency (UFA).
ii.
All consumer complaints, regardless of the area will be handled by a Financial Redressal Agency (FRA).
iii.
There will be a single tribunal, the Financial Sector Appellate Tribunal (FSAT) which will hear appeals regarding the entire sector.
iv.
There are also three other agencies in the recommendations, along with the Reserve Bank of India which will continue to oversee banking.
The horizontal structure will serve the interests of the consumers of financial services (of individuals and businesses, both) much better. For one, it should
eliminate regulatory arbitrage
– the recent IRDA vs SEBI spat on ULIPs happened because the two agencies’ views on the characteristics of investment products were very different. Another advantage of the horizontal structure would be that consumer complaints about a sector would get separated from the regulator. This is important because a certain class of consumer complaints have mistakes or oversights by the regulator at their root. Recognising this root cause means admitting to its own flaw, something that is hard for any organisation.
A. INDIAN MONEY MARKET
Money Market is the short-term financial market of an economy. In this market, basically, money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.) who are either
cash-surplus
or
cash-scarce
. The trading is done on a rate known as
discount rate
which is determined by the market and guided by the availability of and demand for the cash in the day-to-day trading
10
. The ‘repo rate’ of the time (announced by the RBI) works as the guiding rate for the current ‘discount rate’. Borrowings in this market may or may not be supported by collaterals. In money markets the
financial assets
which have quick conversion quality into money and carry minimal transaction cost are also traded
11
. Money market may be
defined
as
a market where short-term lending and borrowing takes place between the cash-surplus and cash-scarce sides.
The market operates in both ‘organised’ and ‘unorganised’ ways in India. Starting from the ‘person-to-person’ mode and converting into ‘telephonic transaction’, it has now gone
online
in the age of internet and information technology. The transactions might take place through the intermediaries (known as brokers) or directly between the trading sides.
The short-term financial market of an economy is known as the money market. In the money market, basically money is traded between individuals or groups (i.e., financial institutions, banks, government, companies, etc.) who have either cash-surplus or cash-scarce. The trading is done on a rate also known as
discount rate
which is determined by the market and guided by the availability and demand for the cash in the day-to-day trading
10
. No collateral security is required to borrow from the money market. In many markets the financial assets which have quick conversion quality into money
11
and carry minimal transaction cost are also traded. Money market may be
defined
as
a market where short-term (upto 364 days) lending and borrowing takes place between the cash-surplus and cash-scarce sides.
There are no organised places for the transactions of the money market. It basically started with a telephonic transaction which has now gone
online
in the age of internet and information technology. The transactions might take place through the intermediaries (known as brokers) or directly between the trading sides.
Need for Money Market
For growth to take place, investments are required in the form of productive assets. Such investments are long-term in nature. Funds for long-term purposes are raised either through borrowings from the banks, or the financial institutions, or through the security market by issuing shares or debentures. Such funds are supplied by the long-term financial market, i.e. the capital market and the firms or the productive assets are set up in an economy. But only the setting up of firms does not guarantee production as these firms keep facing fund mismatches in the process of continued production. There is another required segment of financial market which could supply timely funds to these firms so that they could continue their production process. Such funds are required usually for a short period (days, fortnights, few months) of time and thus are considered as their working capital requirements. The segment of financial market which caters to the short-term requirements of such funds for the eneterprises is known as the
money market
or the
working capital market
of the economy. The short-term period is defined as upto 364 days.
The crucial role money market plays in an economy is proved by the fact that if only a few lakhs or crores of rupees of working capital is not met in time, it can push a firm or business enterprise to go for lock-out set up with thousands of crores of capital. If lock-out happens, the firm might default in its payments losing its age-old credit-worthiness! This is why it is essential for every economy to organise a strong and vibrant money market which has wider geographic presence (the reason why it is today internet-based).
Which of the components of the financial market is more important for an economy, money market or capital market? This question is not logical, as both are complementary to each other. If the financial market needs to serve its real purpose for the economy, both the segments need strengthening and vibrancy.
Money Market in India
The organised form of money market in India is just about two decades old. However, its presence has been there but restricted to the use of the Government only
12
. It was the
Chakravarthy Committee
(1985) which for the first time underlined the need of an organised money market in the country
13
and the
Vahul Committee
(1987) laid the blue print for its development
14
.
Money market in India is not an integrated unit and today it has two segments: