NAME:
S.SHALINI

REG NO:
16BBA0041

EVOLUTION
OF INDIAN FINANCIAL SYSTEM:

Phase-I:
PRE-1951

The organization of the Indian financial
system before 1951 had a close resemblance with the theoretical model of a
financial organization in a traditional economy. A traditional economy,   “is one in which the per capital output is
low and constant.” The principal features of the pre-1951 financial system were
aptly. “The principal features of the pre-independence industrial financing
organizations are the closed-circle character of industrial entrepreneurship; a
semi-organized and narrow industrial securities market, devoid of issuing
institutions and the virtual absence of participation by intermediary financial
institutions in the long term financing of the industry. As a result, the
industry had very restricted access to outside savings. It simply means that
the financial system was not responsive to opportunities for industrial
investment. Such a financial system was clearly incapable of sustaining a high
rate of industrial growth, particularly growth of new and innovating
enterprises.

Phase
II: 1951 to 1990

In sharp contrast to the position around
1951, the financial system have the ability of the system to supply finance and
credit to varied enterprises in diverse forms was greatly strengthened during
the second phase. The Indian financial system during the post-1951 period
evolved in response to the imperatives of planned economic development. In
pursuance of the broad economic and social aims of the state to secure economic
growth with social justice as enshrined in the Indian Constitution, under the
Directive principles of State Policy, the scheme of planned economic
development was initiated in 1951. The introduction of planning had important
implications for the financial system. With the adoption of mixed economy as
the pattern of industrial development, in which a complimentary role was
conceived for the public and private sector, there was a need for an alignment
of the financial mechanism with the priorities laid down by the Government’s
economic policy. In other words, planning signified the distribution of
resources by the financial system to be in conformity with the priorities of
the five-year plans. The requirement to allocate funds in keeping with the corresponding
pattern implied Governmental control over distribution of credit and finance.
The main elements of the financial organization in planned economic development
could be categorized into four broad groups:

·        
Public /Government ownership of
financial institutions.

·        
Fortification of the institutional
structure.

·        
Protection to investors and

·        
Participation of financial
institutions in corporate management.

Phase
III: Post 1990

The Indian financial system, since the
mid-eighties in general, and the launching of the new economic policy in 1991
in particular, has been characterized by profound transformation.

Needs for economic reforms or new
economic policy was felt mainly because of the following reasons:

Increasing in fiscal deficit was main
reason to bring new economic policy. It was 5.4% of gross domestic product in
1981-82 and rose up to 8.4 % of GDP in 1990-91.

Disequilibrium in balance of payment is
occurred when total imports exceed the total exports. In 1980-81 it was adverse
with the Rs. 2,21 crores and rose up to 17,367 crores in 1990-91.

Petrol prices were at high at the time of
Iran war in 1990-91 and during that time India did not get any remittances from
gulf countries and which lead to adverse balance of payment. It was called Gulf
Crisis.

Diminishing foreign reserves were not
sufficient even to pay two weeks’ imports in 1990-91. Reserves were Rs 8151 cores
in 1986-87, declined up to 6252 crores in 1989-90.

Increasing pressure of inflation due to
rise in prices. Cost of production is high due to high rate of inflation which
affects the domestic and foreign demand.

Lack of sufficient gain form public
sector in recent years due to poor performance of some of the public sector
enterprises and suffered loss.

On view of above reasons it was
inevitable for the government to adopt new economic policy.

The fundamental philosophy of the
development process in India shifted to free market economics and the
consequent liberalization, deregulation, globalization of the economy.

 Major economic policy changes such as macro
economics stabilization,  of industries,
trade liberalization, currency reforms, reduction in subsidies, financial
sector, capital market, banking reforms privatization, disinvestments in public
sector units, tax reforms, and company law reforms in terms of simplifications
were gradually implemented, and they have had far-reaching impact on the
structure of the corporate industrial sector in India.

In such an emerging economic scenario,
the role of the Government in economic management did obviously shrink and with
greater momentum in the process of economic liberalization/globalization, the
relative importance of the Government in this sphere will decline further.

 As
a logical corollary, the role of the Government in the distribution of finance
and credit is marked by a considerable decline and the organization of the
Indian financial system, dominated until the mid-eighties by state control is
witnessing capital market-oriented developments/ reforms.

The capital market is emerging as the
main agency for the allocation of resources and all segments of the Indian
economy like the public sector, private sector, and state governments are
competing to raise resources in the capital market.

The essence of these developments is the
fact that the Indian financial system is poised for integration with the
savings pool in the domestic economy and abroad.

 The notable developments in the organization
of the Indian financial system during this phase are briefly outlined below
with reference to (i) privatization of financial institutions (ii)
reorganization of institutional structure and (iii) investor protection
framework.

 

Developments in the
Indian financial system from 1900-2017

Indian economy has over the decades shown marked
improvements. It is in fact moving on the path of development. The following
facts are improvement here:

1.)   
Rise in national income:

India’s national income i.e NNP at factor
cost was around 2,55,000 crore in 1950-1951 which rose to nearly 50,00,000 crore
in 2013-14. Thus, over a period of 63 years the NNP has increased by about 18
times.

Over, the period 1991-2011, the economy grew
at an average rate of 6.8% per annum. This was significantly higher than the
growth rate of 3.5% per annum achieved during 1950-1951 to 1990-1991.

Although there has been a slow down in the
growth rate to less than 5% per annum since 2012-2013, this seems to be a
transitory and cyclical phenomenon and it is expected that with improvement in
the performance of the global economy and onset of domestic institutional
reforms, the economy would come back to high growth trajectory in coming years.

 

2.)   
Rise in per capita income:

Per capita income in India was 7,114 in
1950-1951 at constant price. It rose 39,904 in 2013-2014. Thus, over a period
of 63 years the per capita income has increased by more than four and a half
times.

If we consider the period 1950-1951 to
1990-1991, the rate of increase in per capita NNP was roughly 1.6% per annum.
Since 1990-1991, the per capita income shows an uptrend. It has increased
roughly at a rate of about 5.5% per annum.

 

3.)   
Significant changes in occupational distribution of population:

By occupational structure of a country we
mean the distribution of work force in different occupations of the country.

All occupations are broadly divided into
three groups.

Primary sector: primary sector includes
agriculture and other activities related with agriculture such as forestry,
poultry farming etc.

Secondary sector: This includes all types of
manufacturing activities including construction etc.

Tertiary sector: This sector includes trade,
transport, communication, banking, and other such services.

In general, it has been found that as an
economy grows, there is a shift of labor force from primary sector to secondary
and tertiary sectors.

 

4.)   
Development in the banking and financial sector:

After independence, the process of
nationalization was started.

In 1949 reserve bank of India was
nationalized and later in 1969 and 1980 many big banks were nationalized.

As a result, banks which earlier catered to
very small population have now reached at every nook and corner.

Agricultural sector, small scale industries
and other sectors have been getting bank’s funds on a priority basis and at
concessional rates of interest from NABARD & RRB’s.

Thus, we can say, that India is on the road
of development.

 

AFTER INDEPENDENCE

 

1.)   
Industrial growth:

·        
Ups and downs during the period 1951to 2010-2011.

A
significant decline was experienced for 15years from 1965-1980, annual rate of
industries fell down to 4.1%.

·        
The industrial sector faced the process of retrogression and
deceleration during the period 1965-1980. The reasons were

   1. Unsatisfactory performance of agriculture

   2. Slackening of real investment especially
in public sector.

   3. Slow down in import substitution

   4. Regulation and control over private
sectors

   5.  Narrow
market for industrial goods, especially rural area.

2.)   
Development of basic and capital goods industries:

·        
The structure of industry has shifted in favour of basic and capital
goods and intermediate goods sector during the planning period.

·        
In second plan(1956-1961), based on mahalanobis model emphasized upon
the establishment of capital and basic good industries.

·        
Three steel plants were set up in the public sector at bhilai, Rourkela
and Durgapur in the second plan.

3.)   
Growth of consumer good industries:

·        
There has been a remarkable growth of consumer goods industries. Since
1991, important changes have occurred in the industrial structure.

·        
Intermediate and consumer goods have got more importance than basic and
capital goods.

4.)   
Modernization:

·        
Industrial sector has become broad-based and modernized.

·        
The role of traditional industries like textiles has reduced and role of
non-traditional industries like engineering goods, chemical goods and
electrical goods has improved tremendously.

 

Development in the banking and financial
sector:

 

·        
In the pre-reform period the banking system functioned in a highly
regulated environment characterized by

1.     
Administered interest rate structure

2.     
Quantitative restrictions on credit flows

3.     
High reserves requirements under cash reserve ratio

4.     
Keeping significant proportion of lendable resources for the priority
sectors under statutory liquidity ratio.

 

CRR
was gradually lowered from its peak at 15 percent during pre-reforms year to
4.5 percent in June 2003 but raised to 5 to 7.5 percent in 2007. Since then it
has been increased or decreased depending upon the requirements of the country.
At present (July 2014) it is 4 percent.

SLR
was reduced from its peak of 38.5% during 1990-1992 to 24 percent in November
2008 but raised to 25 percent in 2010. At present it is 22 percent (September
2014)

In
view of the link between monetary expansion and inflation in first half of the
2008-2009, the policy of the RBI was oriented towards controlling monetary
expansion. This was done by raising cash reserve ratio, repo rate, reverse repo
rates. In the second half of 2008-2009, the situation changed. There was
liquidity crunch in the economy as there was outflow of foreign exchange and
virtual freezing of international credit. As a result, monetary stance of RBI
underwent abrupt change and it responded to the emergent situation by
facilitating monetary expansion through decreases in the cash reserve ratio,
repo and reverse repo rates and statutory liquidity ratio.

In
view of the persistent high level of inflation in the years 2009-2010 and
2010-2011, the RBI has kept various rates at high level. Since then also
depending upon the requirements in the economy the RBI has increased or
decreased the various rates. It is to be noted that although the Indian
financial markets are more open and globalised, they still are under strict
vigil of the reserve bank of India. That is the reason why the recent global
financial turbulence did not affect India much.

 

 

Since
independence, important developments have taken place in the banking and
financial sector. Initially banks were under private ownership. But after
independence, the process of nationalization was started. In 1949 reserve bank
of

 India was nationalized and later in 1969 and
1980 many big banks was nationalized. As a result, banks which earlier catered
to very small population have now reached at every nook and corner.
Agricultural sector, small scale industries and other sectors have been getting
bank’s funds on a priority basis and at concessional rates of interest.

Thus,
we can say, that although India is economically not so strong economy, but it
is on the road development. If it’s present pace of development countries, in
the near future it will become an economic force.