Financial Reform in India

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Indian Financial Sector Reforms: A Corporate Perspective Jayanth R. Varma Reproduced with the permission of Vikalpa, the journal of the Indian Institute of Management, Ahmedabad, in which the paper was first published (January-March 1998, 23(1), 27-38). Ó Vikalpa ( All rights reserved Until the early nineties, corporate financial management in India was a relatively drab and placid activity. There were not many important financial decisions to be made for the simple reason that firms were given very little freedom in the choice of key financial policies. The government regulated the price at which firms could issue equity, the rate of interest which they could offer on their bonds, and the debt…show more content…
This is partly because the economic reform process itself took place amidst two serious crises involving the financial sector: · the balance of payments crisis that threatened the international credibility of the country and pushed it to the brink of default; and · the grave threat of insolvency confronting the banking system which had for years concealed its problems with the help of defective accounting policies. Moreover, many of the deeper rooted problems of the Indian economy in the early nineties were also strongly related to the financial sector: · the problem of financial repression in the sense of McKinnon-Shaw (McKinnon, 1973; Shaw, 1973) induced by administered interest rates pegged at unrealistically low levels; · large scale pre-emption of resources from the banking system by the government to finance its fiscal deficit; · excessive structural and micro regulation that inhibited financial innovation and increased transaction costs; · relatively inadequate level of prudential regulation in the financial sector; · poorly developed debt and money markets; and · outdated (often primitive) technological and institutional structures that made the capital markets and the rest of the financial system highly inefficient. Ó Vikalpa ( All rights reserved 3 Over the last six years, much has been achieved in
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