insight economics

7/21/2019 Insight Economics

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Mobilization of Resources 3: Government Finances

GoI retains a big role in economy. In aftermath of LPG reforms it has !ulle" bac# substantially from!rivate sector yet its !resence is un$uestionable an" "esirable in social sector "efense an" security!rovision of !ublic goo"s an" services etc. It has huge bureaucracy %hich consumes enormous nationalresources. Further in line %ith mo"ern conce!t of Mar#et &ocialism government intervenes in case of

mar#et failures for %hich it nee"s to !rovi"e services or goo"s significantly belo% cost. In effectgovernment's e(!en"iture generally sur!asses its revenue %hich results into Revenue or Fiscal "eficit.In the first !lace ma)or source of government revenue is from ta(ation but there are non*ta( sourcestoo. +t last government resorts to "eficit financing to fulfill its commitments. +ll this ha!!ens un"eraegis of Finance Ministry.

Finance Ministry

,his ministry is biggest sub"ivision of GoI an" has un"er it largest number of "e!artments -/. It alsohas one Minister of &tate.Departments under it are

0. 1conomic +ffairs2. 1(!en"iture

3. Revenue. Financial &ervices. 4isinvestment

-Please e(!lore sites an" have a glance at sub"ivisions/

,his ministry ecli!ses %hole economic an" financial system. +ll regulatory bo"ies an" attache" officesrelating to economics an" finance come un"er it.
http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.asphttp://finmin.nic.in/the_ministry/dept_expenditure/index.asphttp://dor.gov.in/http://financialservices.gov.in/http://www.divest.nic.in/http://finmin.nic.in/the_ministry/dept_expenditure/index.asphttp://dor.gov.in/http://financialservices.gov.in/http://www.divest.nic.in/http://finmin.nic.in/the_ministry/dept_eco_affairs/dea.asp


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Expenditure: Plan and non-Plan
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a) Plan Expenditure: +s the name suggests !lan e(!en"iture is "irecte" to%ar" buil"ing !ro"uctivesocial an" !hysical assets or %e can say achieving the goals of "evelo!ment. 1(!en"iture on all5entrally &!onsore" &chemes li#e 6R1G+ I54& etc. are !art Plan 1(!en"iture. ,his till no%remaine" in han"s of !lanning commission. 6o% %ith abolition of P5 future "evelo!ment are to beseen.

Gross bu"getary outlay for !lan 5entral !lan !lus central assistance to state an" 7,s

b) Non Plan Expenditure 6on*!lan revenue e(!en"iture is incurre" on interest !ayments subsi"ies-mainly on foo" an" fertilizers/ %age an" salary !ayments to government em!loyees grants to &tatesan" 7nion ,erritories governments !ensions !olice economic services in various sectors othergeneral services such as ta( collection social services an" grants to foreign governments. It alsoinclu"es "efense loans to !ublic enter!rises loans to &tates 7nion ,erritories an" foreigngovernments.

Rangarajan ommitteein 2808 recommen"e" that this "istinction shoul" be "one a%ay %ith. Reason%as that this "istinction resulte" in over focus on Plan e(!en"iture an" neglect of 6on !lane(!en"iture. It !ro)ecte" 6on Plan e(!en"iture as a %aste e(!en"iture an" various %elfare lobbies #e!t

!ressurizing government to increase !ro!ortion of !lan e(!en"iture at cost of non*!lan. ,his resulte" insubstan"ar" $uality an" un"erfinancing of basic res!onsibilities of government %hich rely on 6on*!lane(!en"iture.

It is felt that in absence of this "istinction 6on*!lan e(!en"iture can out!ace Plan e(!en"iture an"ma)or &afety net schemes %ill suffer a set bac#.

+!art from this e(!en"iture is also classifie" into! apital and Re"enue Expenditure# Formerinvolves creation of "urable ca!ital assets an" latter is consum!tion e(!en"iture %ith no "urable assetscreate".

Re"enue: $ax and non-tax Re"enue

+s alrea"y sai" e(!en"iture of the government is "ominantly finance" by ta( revenue.

0. $ax re"enue

Direct $axes

,hese involve ta(es such as income ta( %ealth ta( cor!orate ta( etc. Peculiar feature of "irect ta( isthat !erson %ho is charge" to ta( himself is liable to !ay ta(.

%ndirect $axes

In this case ta( is generally on transactions commo"ities etc. In this case !erson %ho !ays ta( canclaim ta( so !ai" from customer. ,his %ay %hole bur"en is shifte" on ultimate consumer.

&alue added $ax

Let's ta#e a ty!ical value chain of Manufacturer* %holesaler*retailer* 5onsumer. 9ere value a""ition-in sale !rice/ is at three stages viz. %hen goo"s move from manufacturer %holesaler an" retailer tofinally consumer. Let res!ective sale !rices be 088 028 an" 08.

If In"irect ta( -say &ales ta(/ is 08 it %ill be collecte" at three stages on same !ro"uct. &o ne% !rices%ill be Manuf. ; 088holesaler ; 008 < 08 -ta(/ ; 020 < Rs 28 -!rofit/ ; 00=Retailer; 00< 08 -ta(/ ; 0 < 38 -!rofit/ ; Rs 0?. ,his %ay %ith sim!le flat sales ta( rateconsumer en" u! !aying substantially higher !rices. 9e also !ai" ta( on ta( %hich is calle" casca"ing


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effect -note that Rs 00 at %hich 08 ta( %as claime" by retailer alrea"y inclu"es Rs 20 of ta(/.Government got ta( of 08


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G&, %ill

0. &im!lify an" harmonize the in"irect ta( regime in the country.2. G&, %ill broa"en the ta( base

It is feature of a goo" ta(ation regime that %hile #ee!ing ta( rates lo% they shoul" attem!t to inclu"e asmuch !eo!le as !ossible un"er ta( net.

3. Result in better ta( com!liance "ue to a robust I, infrastructure.

4ue to the seamless transfer of in!ut ta( cre"it from one state to another in the chain of value a""itionthere is an in*built mechanism in the "esign of G&, that %oul" incentivize ta( com!liance by tra"ers. Itis thus e(!ecte" that intro"uction of G&, %ill foster a common an" seamless In"ian mar#et an"contribute significantly to the gro%th of the economy.

. Re"uce cost of collection for government: 5urrently government has huge bureaucracycollecting "ifferent ta(es. Integration %ill naturally result into "o%nsizing of bureaucracy an"hence re"uction of collection costs. +musingly in case of %ealth ta( -"irect ta( charge" over%ealth over Rs. 38 la#hs/ collection is so lo% that cost of collection is more than ta( collecte".

. Im!act on Inflation: In long term G&, %ill un"oubte"ly result in easing of inflation. 9o%everas initially rates of integrate" G&, are e(!ecte" to be #e!t as high as 0C or more it is %ellabove current service ta( e(cise or @+, rates. In case of services it %ill increase !rices"irectly. In case of other goo"s inflation "e!en"s u!on their !resent com!onent of ta(ation viz.e(cise @+, 5ustom etc. For e.g. some goo"s %hich are currently e(em!te" from e(cise -butare chargeable to @+,/ %ill bear ne% bur"en of e(cise in form of increase" rate -a!!ro(. 0C/of G&,.

Follo%ing are the salient features of this amen"ment ill:

+ ne% +rticle 2C+ is !ro!ose" %hich %ill confer simultaneous !o%er to 7nion an" &tate

legislatures to legislate on G&,.

+ ne% +rticle 2J+ is !ro!ose" for the creation of a ,oods / .er"ices $ax ouncil%hich%ill be ajoint +orum o+ t'e entre and t'e .tates. ,his 5ouncil %oul" function un"er the'airmans'ip o+ t'e 0nion Finance Ministeran" %ill have Ministers in c'arge o+Finance1$axation or Minister nominated by eac' o+ t'e .tates / 0$s 2it' 3egislatures asmembers. ,he 5ouncil %ill ma#e recommen"ations to the 7nion an" the &tates on im!ortantissues li#e ta( rates e(em!tions threshol" limits "is!ute resolution mo"alities etc.

,he proposed ,.$has been "esigne" #ee!ing in min" the fe"eral structure enshrine" in the5onstitution an" %ill have the follo%ing im!ortant features:

0. 5entral ta(es li#e 5entral 1(cise 4uty +""itional 1(cise 4uties &ervice ,a( +""itional5ustoms 4uty -5@4/ an" &!ecial +""itional 4uty of 5ustoms -&+4/ etc. %ill be subsume" inG&,. -6ote that Abasic custom "uty' in not inclu"e"/

2. +t the &tate level ta(es li#e @+,D&ales ,a( 5entral &ales ,a( 1ntertainment ,a( Ectroi an"1ntry ,a( Purchase ,a( an" Lu(ury ,a( etc. %oul" be subsume" in G&,.

3. +ll goo"s an" services except alco'olic li4uor +or 'uman consumptionan" Petroleum andpetroleum products%ill be brought un"er the !urvie% of G&,.

. oth 5entre an" &tates %ill simultaneously le"y ,.$ across t'e "alue c'ain. 5entre %oul"levy an" collect 5entral Goo"s an" &ervices ,a( -5G&,/ an" &tates %oul" levy an" collect the&tate Goo"s an" &ervices ,a( -&G&,/ on all transactions %ithin a &tate.


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. %n case o+ interstate trade ,he 5entre %oul" levy an" collect the Integrate" Goo"s an"&ervices ,a( -IG&,/ on all inter*&tate su!!ly of goo"s an" services. ,here %ill be seamlessflo% of in!ut ta( cre"it from one &tate to another. Procee"s of IG&, 2ill be apportionedamong t'e .tates.

C. G&, is a destination-based tax. +ll &G&, on the final !ro"uct %ill or"inarily accrue to the

consuming &tate. It means that as goo"s %ill move in value chain from !ro"ucer to consumer%hole G&, bur"enD!rice %ill be recovere" from consumer. -+s e(!laine" in e(am!le for @+,above/

J. G&, rates %ill be uniform across the country. 9o%ever to give some +iscal autonomy to t'e.tates and entre! t'ere 2ill a pro"ision o+ a narro2 tax band o"er and abo"e t'e +loorrates o+ ,.$ and .,.$.

?. It is !ro!ose" to levy a non-"atable additional taxof not more than 0 on su!!ly of goo"s inthe course of inter*&tate tra"e or commerce. ,his ta( %ill be for a !erio" not e(cee"ing 2 yearsor further such !erio" as recommen"e" by the G&, 5ouncil. ,his a""itional ta( on su!!ly ofgoo"s shall be assigned to t'e .tates +rom 2'ere suc' supplies originate. ecause G&, is a"estination base" ta( ta( %ill accrue to states in %hich goo"s are ultimately sol". &o tocom!ensate states from %hich goo"s originate" this -non*vatable ta(/ is !ro!ose".

Finance Minister e(!ects that if they are able to !ush G&, through state legislature smoothly then theycan roll out G&, in 280C. +s this tin#ers %ith fe"eral fiscalism of the nation an" re$uire amen"ment in&che"ule J an" so many other fe"eral articles -2C+*2J+/ it is su!!ose" to be !asse" by atleast halfof state legislatures along %ith in both houses of !arliament by s!ecial ma)ority. &o it is to be seen that%hether current government able to "o so.

$ax re+ormshave been in ne%s for some time. G&, is one of the ma)or reform for %hich governmentis %or#ing. &ome other to!ics an" issues are

0. Minimum 5lternate $ax-Government has in or"er to attract investments in various bac#%ar"geogra!hic locations or in e(!orts or in certain crucial in"ustry li#e Foo" !rocessing or in

&1KD1E7 #ee! rolling out ta( holi"ay schemes. 7n"er these schemes investment as !er somecon"itions attracts a certain ta( e(em!tion for a certain !erio".

Evertime businesses starte" e(!loiting these schemes to fullest by Aaggressive ta( !lanning'. 7n"erthese !lanning com!anies often use" some or other loo!hole to secure more ta( e(em!tion than %asreasonably "ue un"er s!irit of the scheme. Reliance In"ustries %as !articularly notorious for this abouta "eca"e bac#. 1ventually these com!anies "eclare" significant !rofits an" "ivi"en"s year after yearbut Ata(able !rofit' as !er income ta( rule remaine" nil. 6ote that Aboo# !rofits' an" A,a(able Profits'are "ifferent. +")ustments are ma"e into former to arrive at latter. &o say %ith aggressive ta( !anningAboo# !rofits' are Rs 088 5rore but after a")ustments Ata(able !rofits' comes out to be 6IL.

,o reme"y this Minimum alternate ,a( %as intro"uce" un"er %hich Minimum Floor rates %ere

intro"uce" on %hich com!anies %ill not%ithstan"ing any e(em!tions it en)oy %as liable to ta(es. ,hisrate %as #e!t high.

y this move situation move" to o!!osite e(treme. 6o% bonafie" investor %ho investe" only becauseof concessions %ere force" to !ay ta(es. ,his #e!t investment a%ay from In"ian &!ecial economiczones an" other incentivize" "estinations.

2. Retrospecti"e $axation fe% years bac# 9utchison -,elecom 5om!any base" in 9ong ong/sol" its sta#e in 9utch 1ssar to @o"afone PL5 an" rea!e" huge !rofits. ut all this !rofit %hichaccrue" in In"ia esca!e" from income ta( by e(!loiting loo!holes in the la%. ,his %as


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enormous loss to e(che$uer. &ince this event income ,a( "e!artment ha" been "es!eratelytrying to recover ta( from @o"afone. For this government in 2802 bu"get gave itself !o%er forretros!ective amen"ment in Income ,a( an" finance acts. ,hrough this government can ma#ene% la%s or change current la%s or cancel amen"ment all %ith force from bac#"ate. 6ote that+rticle 28 !rohibits retros!ective legislation in case of criminal la% only an" it allo%s same for

civil la%s.3. ,eneral 5nti 5"oidance Rules It %as to be intro"uce" %ef. 0st+!ril 280 to chec#

aggressive ta( !lanning an" flouting of income ta( la%s. It gives more !o%er to Income ,a(officials on ho% treat a sus!icious entry in boo#s of accounts. Enus to !rove that entry isbonafie" is on assesse. ut bu"get 280 "i"n't mention anything about G++R after bu"get

Mo& for finance re!lie" in !arliament G++R %ill be a!!licable from 0st+!ril 280.N

+ll this -M+, retros!ective ta(ation an" G++R/ gave In"ian Government an" Income ,a( "e!artmentmuch ba" name in eyes of all ty!es of investors an" business community. &tate %as accuse" ofunleashing Ata( terrorism' on businesses to ma#e goo" its o%n %ea#nesses an" messe" u! fiscalsituation.

,he government trie" to revive investor sentiment by constituting an expert committee c'aired byPart'asarat'i .'ometo re*e(amine the !rovisions on G++R an" retros!ective amen"ments. ,hecommittee recommen"e" a significant curtailment of G++R an" cautione" against retros!ectiveamen"ments e(ce!t in the rarest of rare cases.

. $ax 5dministration Re+orms ommission 6$5R) +lso un"er Mr. Parthasarathi &home-,his is "ifferent from above mentione" e(!ert !anel/. Its terms of reference as name suggestsinclu"e" overall reforms in ta( organization structure !rocesses !ractices so as to re"uce costof ta( collection an" increase ta( base. ,his involve" ca!acity buil"ing of ,a( "e!artments inor"er to minimize ta( evasion etc. Ma)or recommen"ations %ere

Merge 5entral oar" of 4irect ,a(es an" 5entral oar" of 1(cise an" 5ustoms -these are

currently un"er "e!artment of revenue an" oversees "irect an" in"irect ta(es res!ectively/ +bolish !ost of revenue secretary an" instea" council of chairmen of boar"sN shoul" be

a!!ointe" for )ob. >or# of 4e!t. Ef Revenue be allocate" to above t%o boar"s it %ill result in better efficiency in

collection. +t least 08 of ta( a"ministration bu"get shoul" be spent on tax-payer ser"ices

Income ,a( return shoul" inclu"e %ealth ta( return Pre fille" returns coul" be consi"ere".

P+6 number shoul" be ma"e common business identi+ication number to be use" by other

government "e!artments also such as customs central e(cise service ta( 4GF, an" 1PFE +voi" retros!ective amen"ments in ,+O L+>& results in Protracte" "is!utes

$ax councilhea"e" by the c'ie+ economic ad"isorin the finance ministry be set u! to "evelo!

a commontax policy, analysis and legislationfor both direct and indirect taxes 1fficient an" s!ee"y !ayments of ta( refun"s an" Passboo# scheme for ,4&

,a( being main source of government finance is central for resource mobilization in economy. ut inIn"ia ,a( to G4P ratio is $uite lo%. 5ombine" -state center/ ta( to G4P ratio is only 0. In other"evelo!ing countries it is as high as 3. For center alone in In"ia it is -00*02/. Main reason isnarro% ta(ation base an" huge ,a( 1(!en"iture -or ,a( foregone/ by GoI.

$ax Expenditure1$ax Foregone1 $ax .ubsidies
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,he statutory rates of ta(es as notifie" by res!ective la%s are "ivergent from the actual or effectiverates of ta(es %hich is attributable to ta( !rovisions that allo%

"e"uctions or e(em!tions from the ta(!ayers' ta(able e(!en"iture income or investment

"eferral of ta( liability

!referential ta( rates

,hese !rovisions allo% !eo!le to !ay lo%er ta(es by claiming "e"uctions un"er various rules.5onse$uently significant amount of ta( is legally not receive" by government. ,his !oint remains most!otent %ea!on in han"s of left leaning !arties to attac# government.

+ ta( e(!en"iture statement %as lai" before the Parliament for the first time in 288C*8J an" it see#s tolist the revenue im!act of ta( incentives or ta( subsi"ies that are a !art of the ta( system of the centralgovernment.

Intro"uction of M+, significantly re"uce" ta( foregone.

>hile the magnitu"e of ta( e(!en"itures or revenue forgone from central ta(es is sho%ing an u!%ar"tren" for both "irect an" in"irect ta(es it is im!erative to intro"uce sunset clause %ith every !rovision

%hich facilitates ta( e(!en"iture.Revenue foregone forms significant !art of G4P at *

Rea" these articles 0an" 2

Non $ax Re"enue

6on*ta( revenues of the centre mainly consist of interest an" "ivi"en" recei!ts of the governmentrecei!ts from the services !rovi"e" by central government li#e su!!ly of central !olice force issue of!ass!ort an" visa registration of com!anies !atents an" licence fees royalty from offshore oil fiel"s5oal mines an" various recei!ts from the telecom an" other sectors.

Further there are sometimes han"some !rocee"s in from of non*"ebt ca!ital recei!ts %hich arise from

"isinvestments. 4isinvestments targets last year %ere faile" at miserably an" this year government is$uite o!timistic about rea!ing benefits from goo" stoc# valuations at stoc# mar#ets. 4isinvestment %as"iscusse" at length 'ere#

7udgetary De+icits

&o far %e sa% government finances in follo%ing form
http://www.outlookindia.com/article/How-Much-Can-We-Forgo-To-India-Inc/291424http://www.thehindu.com/opinion/columns/sainath/the-feeding-frenzy-of-kleptocracy/article4513159.ecehttp://www.insightsonindia.com/2014/12/12/post-liberalization-industrial-policies/http://www.outlookindia.com/article/How-Much-Can-We-Forgo-To-India-Inc/291424http://www.thehindu.com/opinion/columns/sainath/the-feeding-frenzy-of-kleptocracy/article4513159.ecehttp://www.insightsonindia.com/2014/12/12/post-liberalization-industrial-policies/


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9igh s!en"ing in social an" !hysical infrastructure %hich is often as !er !lan e(!en"iture even highernon*!lan commitments lo% ta( to G4P ratio an" high ta( foregone all this boil "o%ns to 4eficits i.e.s!en"ing more than earning. ,here are "ifferent forms of bu"get "eficit viz. !rimary 4eficit Revenue4eficit Fiscal 4eficit.

>henever %e are tol" that go"ernment expenditurehas e(cee"e" its receipts! in s'ort t'at 2e 'a"eincurred budget de+icit! be+ore arri"ing at any conclusion 2e need to as8 some +urt'er 4uestionsbe+ore arri"ing at any conclusions#

,hese $uestions may be li#e %as Aca!ital recei!ts' or Aborro%ings' use" to finance revenuee(!en"iture If so this is un"esirable an" correction in this shoul" be !rime focus of government.

If re"enue expenditure is less t'an Re"enue income t'an Re"enue de+icit ta8es place . -R1*RI ;R4/ In this situation "eficit %ill be finance" by ca!ital recei!ts. 5a!ital recei!ts come from !ro"uctive

investments. 7n"er resource mobilization %e are attem!ting to tilt national income a%ay fromconsum!tion to%ar"s savings an" then eventually to%ar"s !ro"uctive investment. ut note here%hat's ha!!ening 9ere Investment resources are sol" off to fun" consum!tion.

Eur 2n"$uestion %ill be %as ca!ital -or even revenue/ e(!en"iture finance" through borro%ings Ifso %e have incurre" +iscal de+icit. It is arrive" at as -,otal 1(!en"iture ,otal Income/ borro%ings; fiscal "eficit

,here may be situation %here Revenue "eficit %as nil but Fiscal 4eficit %as !ositive this in"icates
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that borro%ing %ere use" to finance ca!ital asset creation. 6o% !olicyma#ers an" observers are #eento see that assets %hich are create" on bac# of borro%ings are !ro"uctive enough to serve the interestrates.

ase 9 6dont get disturbed by small +igures)

9y!othetically say %hen un"er M&P regime %heat is !rocure" from farmer by F5I at Rs 0D #g an"then through state P4& this is sol" at "iscounte" !rices of Rs. 0. 4eficit of Rs. 0 has been incurre".6o% at the yearen" government has to !ay farmer its "ue. It got )ust 0 ru!ee from consumer it %illgive balance money from ta( it collecte". 6o% again ta( it collecte" comes out to Rs. 08.

6o% %e can say revenue "eficit of Rs 3 has been Incurre" -Rs. 0*00/

6o% government sol" some P&7 an" is able arrange Rs 2 from that no% fiscal "eficit %ill be Rs. 0%hich %ill be borro%e" by the government. -&o Fiscal 4eficit ; orro%ing/

ase (

6ote that if earning from P&7 %as Rs 3 than there %as no Fiscal 4eficit.

ase >heat !rocure" is for Rs. 0 an" some 4am is create" by Govt. for Rs . >heat sol" for P4& B 0 ta(collecte" is Rs 0. 6o% revenue "eficit is 6il. +n" government sol" some P&7 for 2. Fiscal "eficit isRs 3 %hich %ill be finance" by borro%ing.

,his is much tenable situation. In fact Fiscal 4eficit is use" to create "eman" in economy an" it ismetho" of Re"istribution of resources. 6ote in this e(am!le that ,a( collecte" of Rs. 0 has move"from ta(!ayers to farmers an" ,argete" beneficiaries of P4&. +lso note that &!en"ing of Rs. 0 < ismore than income of government i.e. Rs. 0J. 6o% there is Rs 3 more in circulation an" this on onehan" %ill revive "eman" an" on other it %ill create inflationary con"itions.

It %as Hohn eynes %hich in aftermath of Great 4e!ression !ro!agate" that governments shoul" incur

fiscal "eficits to revive "eman".$'ird 4uestion t'at can be as8ed is 9o% much fle(ibility "o %e have to curtail our e(!en"iture

Interest on borro%ings is non fle(ible an" non*negotiable e(!en"iture. &o it is e(clu"e" from fiscal"eficit to arrive at Primary de+icit# .o primary de+icit ; Fiscal De+icit interest on borro2ings

Fiscal Discipline and FR7M act

Government is %elfare state an" strives to !romote %elfare. ut as e(!laine" above it has financialconstraints. y intervention government shoul" attem!t to buil" ca!acity of !eo!le to survive an" gro%themselves in mar#et. ut at same time government has to set minimum stan"ar"s an" !rovi"e safetynets to "isa"vantage" an" vulnerable !eo!le of the society.

For this to ha!!en successfully in long term re$uire governments to observe strict fiscal "isci!line.,here is al%ays immense !ressure on government for s!en" its resources for com!eting interests. Inturn government is al%ays vulnerable for giving in blin"ly to such "eman"s "ue to !oliticalcom!ulsions. Going too much beyon" its resources may be beneficial in short term but for long term itresults in to !iling u! of "ebt an" ever increasing interest !ayments an" as a result high inflation.

De+icit results in %nter-,enerational ine4uity 4eficit sim!ly means to"ay government is livingbeyon" its means an" to finance its e(!en"iture it borro%s money %hich is to be !ai" bac#ing future.,his borro%ing %ill accumulate interest overtime an" after some time Princi!le along %ith interest %ill


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be !ai" by government by charging future ta( !ayers %ho are force" to !ay for e(!en"iture not beingincurre" over them.

De+icit ruins monetary policy o+ R7% RI ma#es monetary !olicy by monitoring su!!ly of moneyin the economy. Main target behin" this is inflation. +s %e have seen in foregoing "iscussion thatfiscal -an" other/ "eficits increases money su!!ly in the mar#et an inflationary tren" is create".

Fiscal Responsibility and 7udget Management act

,he main !ur!ose %as to eliminate revenue "eficit of the country -buil"ing revenue sur!lus thereafter/an" bring "o%n the fiscal "eficit to a manageable 3 of the G4P by March 288?. 9o%ever "ue tothe 288J international financial crisis the "ea"lines for the im!lementation of the targets in the act %asinitially !ost!one" an" subse$uently sus!en"e" in 288. In 2800 given the !rocess of ongoingrecovery 1conomic +"visory 5ouncil !ublicly a"vise" the GoI to reconsi"er reinstating the !rovisionsof the FRM+.

Further the +ct !rohibits borro%ing by the government from the Reserve an# of In"ia therebyma#ing monetary !olicy in"e!en"ent of fiscal !olicy. ,he +ct bans the !urchase of !rimary issues ofthe 5entral Government securities by the RI after 288C !reventing monetization of government

"eficit.

+fter reinstatement of FRM act ne% targets %ere agree" at. +ccor"ingly current year target is .0last year %as .C.

It shoul" be note" that government use" un"esirable means to contain "eficit last year. GovernmentP&7s %ere force" to shell out huge "ivi"en"s some e(!enses %ere "iffere" on ne(t years an" %orst%as that there %as huge cut on !lan e(!en"iture. ,his crumble" centrally &!onsore" schemes such as6R1G+.

,o"ernment 7orro2ings

Fiscal "eficit is nothing but borro%ings of the government. Government has three sources viz. orro%

from RI orro% from E!en Mar#et or orro% from abroa".In case it borro%s from abroa" it has to see that long term borro%ings "on't are not financing revenueconsum!tion an" !ro"uctive assets are create" against them. ,his is also true for "omestic borro%ings.

Government #ee!s issuing bon"s an" an#s subscribes to these as they are re$uire" to invest in thesebon"s to com!ly %ith &tatutory Len"ing Ratio -22 of net time an" "eman" "e!osits/.

,here is %ell built !rimary an" secon"ary "ebt mar#et in %hich bon" securities are subscribe" to.

If fiscal "eficit is high it %ill result in increase" inflation an" money "eman"e" by government fromany of the source %ill be high. 9ere as "eman" for money becomes high bon" yiel"s %ill shoot u! an"bon" !rices %ill fall. &ay C on" alrea"y tra"ing at ? %ill fall to C this %ill increase yiel" %hich is

no% Rs. C B Rs C bon". ,his increase" yiel" %ill become ne% rate at %hich money can be raise" bygovernment.

If money becomes too e(!ensive government %ill have to resort to


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business. ,hese institutions are #no%n as 5a!ital Mar#et interme"iaries.

,hese are interme"iaries li#e insurance com!anies housing finance com!anies !ension fun"s an"investment fun"s etc. %hich mobilize savings an" fun" long term investments.

6o% again !erson having sur!lus money for long term may be %illing to Alen"' or to Ainvest'. ,hisforms "istinction bet%een debt and e4uity. In former len"er %ill get fi(e" return an" in latter investor%ill get share of his !rofit. ,hese are investe" through "ifferent ty!e of interme"iaries as !er interest oflen"er may be mutual fun" "ebt fun" stoc# mar#et etc.

In financial mar#et +inancial assetsare create" such as "ebenture shares bon"s etc. Financial +ssetsre!resent claim of their hol"er over certain asset %ith certain $uantity. ,his claim arises because of acontract bet%een t%o !arties e.g. len"er an" borro%er or buyer an" seller. In the first !lace these arecreate" %hen fresh money is raise" in the mar#et -either through "ebt or e$uity/. ,hese instrumentsafter being issue" coul" be tra"e" li#e anything else an" they have their mar#et. 6o% there are again"istinctions bet%een primary and secondary mar8ets. Mar#ets in %hich fresh fun"s are raise" are!rimary an" in %hich financial assets are tra"e" are calle" &econ"ary mar#ets.

>'at are Financial Mar8ets?

Financial mar#et is a mar#et %here financial instruments are e(change" or tra"e" an" hel!s in"etermining the !rices of the assets that are tra"e" -also calle" the !rice "iscovery !rocess/. ,hesefacilitate tra"e in financial assets by !rovi"ing !latform for coming together of buyers an" sellers ororro%ers or Len"ers.

Financial mar8ets may be classi+ied on t'e basis o+ -

0. "ebt an" e$uity mar#ets2. money mar#et an" ca!ital mar#et3. !rimary mar#et an" secon"ary mar#et

In"ian Financial Mar#et consists of the follo%ing mar#ets:

apital Mar8ets

Primary ca!ital mar#et

>henever a com!any raises fresh ca!ital or "ebt it "oes so by Ainitial !ublic offer' -IPE/. +lrea"yliste" com!any can again raise ca!ital by Afollo% on !ublic offer' -FPE/.

&econ"ary ca!ital mar#et

&hares %hich %ere issue" in !rimary mar#et remains liste" on stoc# e(changes an" are tra"e". &hare!rices move in accor"ance %ith Mar#et &entiment 1conomic an" Political stability an" fun"amentalsof !articular com!any.

.toc8 Exc'anges

oth these activities are facilitate" by &toc# e(changes. In layman terms stoc# e(changes are Amar#ets'-or man"is/ %here !ros!ective buyer an" seller meets an" item tra"e" is &hares "ebentures bon"s etc.In early "ays there %as !hysical interface bet%een t%o !arties= there %ere me"iators in stoc#e(changes %hich for a commission use" to negotiate the "eal. Lot of buyers %oul" come an" ma#ebi"s for !urchase an" on other han" there %oul" be sellers %ith financial assets attem!ting to sell athighest !ossible !rice. >hen "ifference bet%een selling an" buying bi" is eliminate" "eal is "one.


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Me"iators use" to shout bi"s for their clients. ,his %as #no%n as o!en outcry system.

,he ombay &toc# 1(change -&1/ the ol"est an" the largest stoc# e(change in In"ia. 9istorically ittra"e" for t%o hours in a "ay %ith an o!en outcry system. ,he e(change %as manage" in the interestsof in"ivi"ual members a ma)ority of %hom ha" inherite" their seats. + large !ro!ortion of stoc#s liste"on the e(change %ere not actively tra"e". ,here %as minimum su!ervision from the e(changes an"

s!eculation -satta/ %as ram!ant.

It %as in 02 that in !ursuance of LPG reforms that the &toc# 1(changes %ere reforme". ,hesereforms %ere on the bac# of Legal !rovisions an" technology.

Ene lan"mar# legal reform %as !assage of &ecurities an" 1(change oar" of In"ia +ct 02 %hichcreate" an a!e( in"e!en"ent regulator for ca!ital mar#ets. 1arlier everything %as un"er Financeministry %hich resulte" in consistent interference. +!art from this earlier com!anies have to get theirissue !rice a!!rove" by finance ministry. >ith reforms this control %as also "one a%ay %ith.

+!art from this ,ransactions %ere no% settle" in a se!arate A5learing 9ouse' -as 5he$ue is cleare" inban#ing se!arately/ %hich earlier %as "one mutually bet%een members. Perha!s most effective reform%as '"ematerialization of &ecurities' %hich means conversion of securities from !hysical to electronic

form. In those "ays there %ere !hysical !roofs such as &hare 5ertificates %hich has to be transferre" inname of !urchaser. ,his involve" lot of time efforts an" also stam! "uty. In electronic form securities-share "ebentures etc./ are hel" by A"e!ositories' on behalf of actual o%ners. ,%o "e!ositories in In"iaare 6&4Lan" 54&L. &o tra"e is han"le" by &toc# 1(changes %hich have "esignate" bro#ers li#earv( Parsavnath etc. ,hese bro#ers have account %ith "e!ositories an" interface %ith !ros!ectivebuyers an" sellers. + !erson %illing to tra"e in securities has to o!en a A"emat account' in 4e!ository%ith hel! of bro#er. +s soon as he buys any security it is transferre" to this account.

6o% there is highly so!histicate" electronic an" online tra"ing system in !lane. ,here is real timetransfer of mar#et in"ustry an" stoc# s!ecific information across the country %hich removesinformation asymmetry an" ensure level !laying fiel".

6ational &toc# 1(change -6&1/ is only other national &toc# e(change a!art from &1 an" there arenumerous other regional e(changes.

In every country biggest international stoc# e(change is locate" in its financial ca!ital. 1.g. 6e% Qor#&toc# 1(change Lon"on &toc# 1(change ,o#yo &toc# 1(change &hanghai &toc# 1(change.

+nother im!ortant !oint is that in !ost liberalization !erio" there enormous interface in global capitalmar8ets. In"ia allo%e" Foreign Institutional Investors to invest in In"ian Mar#ets an" FII flo%s no%are its bac# bone. Many In"ian com!anies have raise" fun"s from outsi"e In"ia via. GlobalD+merican4e!ository Recei!ts

In !resent times stoc# mar#ets in"icate health of an economy. ,hey are primary means o+mobili=ation o+ long term sa"ings and in"estment and +ixed capital +ormation . Further %hen

volume of tra"e in mar#ets is significant it lea"s to trans!arent price disco"ery. +s %e have rea"fun"s can be raise" either as a "ebt or as e$uity. &toc# 1(changes enable an" facilitate businesses toraise fun"s !re"ominantly through e$uity. Forces of mar#et -"eman" an" su!!ly/ constantly interactan" this results in fluctuating !rices. ,here is huge army of stoc# analysts %ho #ee! eye on !ricemovement fun"amentals of com!any an" relate" in"ustry an" health of national an" %orl" economy.,his %ay they try to fin" out intrinsic value of a share. 6ormally Investments flo%s into shares %hichare !rice" lo%er than their intrinsic value.
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Further &toc# Mar#ets by !rovi"ing rea"y secon"ary mar#et for long term investment shares givesinvestors an o!tion for easy e(it from the in"ustry. +t the same time it !rovi"es avenues for entry ofne% investors. For e(am!le fe% year bac# significant shares in 1ssar telecom %as ac$uire" by9utchison an" then it %as sol" to @o"afone. Liste" shares ma#e it easy for transactions to ta#e !lace.

,o gauge movement in the mar#et is not an easy tas#. ,here are thousan"s of shares liste" an" they

move in "ifferent $uantum an" may be in "ifferent "irections. &o ho% %oul" %e #no% ho% overallstoc# mar#et is !erforming For this there are in"ices %hich re!resents broa"er tren" of the mar#et.

.toc8 %ndexes

&ense( is one such in"e( %hich is %eighte" average of 38 stoc#s -liste" on &1/ %hich have highestmar#et ca!italization -M5/. M5 !ractically means mar#et value of e$uity of the com!any -no. ofe$uity share issue" multiply by Mar#et !rice of &hare/. >hen %e are tol" that &ense( is u! then itmeans these 38 shares have gone u! together. It's same conce!t li#e "etermining Inflation rate or In"e(of In"ustrial !ro"uction.

&imilarly there is 6ifty*8 for 6&1 stoc#s %hich re!resent %eighte" average of best 8 stoc#s. ,hereare also sector s!ecific in"ices such as I, sector In"e( 5ement Iron &teel Real 1state etc. thesein"ices tells !erformance of com!anies in that sector !ut together.

5onfi"ence of the investors in the mar#et is im!erative for the gro%th an" "evelo!ment of the mar#et.For any stoc# mar#et the mar#et In"ices is the barometer of its !erformance an" reflects the !revailingsentiments of the entire economy. &toc# in"e( is create" to !rovi"e investors %ith the informationregar"ing the average share !rice in the stoc# mar#et. ,he u!s an" "o%ns in the in"e( re!resent themovement of the e$uity mar#et. ,hese in"ices nee" to re!resent the return obtaine" by ty!ical!ortfolios in the country.

&toc# mar#et allo%s tra"ing of "iverse A5a!ital Mar#et Instruments'. ,hese instruments are use" to layclaim over s!ecifie" financial asset. &ome of the ca!ital mar#et instruments are: 1$uity Preferenceshares 4ebentureD on"s +4RsD G4Rs 4erivatives.

>'at are deri"ati"es?

+ "erivative is an instrument %hich "erives its value from an un"erlying asset.

4ifferent !eo!le have "ifference A!erce!tion' about movement of !rices of financial asset in future.,his !rovi"es them avenue for s!eculation an" e(!loit !otential create" by current !rice an" e(!ecte"!rice.

For e(am!le a !erson can buy an Ao!tion' to buy a s!ecifie" asset on s!ecifie" future "ate an" at as!ecifie" !rice. &ay some share is currently !rice" at Rs. 2 an" Mr. O e(!ects it %ill touch 38 rightsafter 0 month. 9e base" on his !erce!tion %ill buy an o!tion to buy this share at Rs. 2 ne(t month. +sthe "ate a!!roaches an" actual !rice of Rs. 2 %ill move. +ny movement %ill create a value of this

contract as -either negative or !ositive/ as he has Aright but not obligation' to buy at Rs. 2 %hatevermay be the rate.

,his is e(am!le ho% "erivative instrument gets its value an" is tra"e" se!arately on stoc# e(changes.,here are many such instruments li#e Futures for%ar" contracts etc.

Ene may as# that %hy "oesn't Mr. O buy that share itself to e(!loit !ossible !rofit uying share %illre$uire him to invest Rs 2 but in case of o!tion he'll !ay small !remium %hile entering into "eal an"he'll "irectly get !rofit on final "ate.


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It shoul" be note" that these contracts are stan"ar"ize" by e(changes an" then sol" as !ro"ucts. It's notli#e for every in"ivi"ual investor bro#ers try to chart a se!arate "eal.

+ "erivative !ic#s a ris# or volatility in a financial asset transaction mar#et rate or contingency an"creates a !ro"uct the value of %hich %ill change as !er changes in the un"erlying ris# or volatility.

4erivatives can be "erive" from &hares 5ommo"ities Foreign 1(change an" Interest rate4ifferentials. Practically it also can be "one from cric#etDfootball matches or even from uncertainties ofclimates

For commo"ity "erivatives there is 6ational 5ommo"ity an" 4erivative 1(change -6541O/ Multi5ommo"ity 1(change -M5O/ an" 6ational Multi 5ommo"ity 1(change -6M51/. Rea" about Its rolein +griculture here

For Regulation of commo"ity "erivative mar#et For%ar" Mar#et 5ommission acts as a!e(regulator.

.ecurities and Exc'ange 7oard o+ %ndia 6.E7%)

&1I %as enacte" in 02 in accor"ance %ith the !rovisions of the &ecurities an" 1(change oar" ofIn"ia +ct 02 to ith every such failure &1I has emerge" stronger %ith !lugging u! the loo! holes. uteven to"ay !artici!ation an" trust of common man in mar#ets is %avering. It is general !erce!tion thatonly u!!er fe% blue chi! com!anies are governe" genuinely observing all "isclosure re$uirements an"other regulations. In other lesser #no%n com!anies mani!ulation of the stoc# !rices by insi"ers-!romoters "irectors an" au"itors/ is ram!ant. In fact &atyam before revelation of scam %as one of thebest !erforming blue chi! stoc#. ut all this %as ha!!ening on the basis of falsely coo#e" u! boo#s an"au"itors %ere !arty to this mani!ulation. In"ian la%s "on't !rovi"e stringent !unishment for frau"scommitte" in the mar#ets. It is ironical that Ra)u Ramalingam's revelation about &atyam frau" an"subse$uent colla!se in share !rices claime" lives of fe% !eo!le %ho committe" suici"e an" Ra)u is outon bail. In contrast 7& la%s are very stringent in this case. It %as observe" in case of Ra)at Gu!ta an"Ra) Ra)anatnam %ho %ere +merican citizens are sentence" for life terms longer than 28 years. ,his is)ust because they %ere accuse" of in"ulging into Ainsi"er tra"ing'= in this case effect on mar#et "oesn'tmatter. Insi"ers are !eo!le %ho are su!!ose" to have access to A!rice sensitive un!ublishe"information' of a com!any. ,hese !eo!le are 4irectors Promoters +u"itors &ecretaries etc. If theytra"e -buy or sell/ in shares on basis of such information that %ill be calle" insi"er tra"ing.

>hen a com!any is liste" its shares are o!en for tra"ing for anyone. &o sovereignty of !romoter"irectors etc. is substantially curbe". Practically o%ner of the com!any can be anyone an" these

o%ners -sharehol"ers/ gather at annual general meet of the com!any to a!!oint ne% "irectors byvoting. Ene share carries one vote. Promotors li#e +mbanis for Reliance hol" ma)ority shares in theircom!anies so in effect %ill of +mbanis !revails an" they en" u! #ee!ing to! !osition for themselves.6o% every "ecision they have to ma#e shall be in interest of these investors at large an" com!any.&toc# !rices fluctuates "ue to three reasons I.e. Macro*1conomic events In"ustry s!ecific events an"5om!any s!ecific events. Information about former t%o generates outsi"e !remises of the com!anybut in last case it's the com!any %hich generates the Information. +ny !rice &ensitive information maytrigger the selloff if its ba" ne%s or reverse may ha!!en in case of goo" ne%s. &o insi"ers being in
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!osition to influence retain bloc# such information may cause harm to investors at large for their!ersonal gain.

&1I strives to !rovi"e level !laying fiel" for insi"ers an" outsi"ers an" hence insi"er tra"ing is!rohibite". &ometimes !romoter creates artificial "eman" by overinvesting in their o%n shares seeinggoo" !erformance of those shares !ublic at large starts investing an" then insi"ers !ull the !lug by

selling their investments at high !rices.

4es!ite of &1I's relentless efforts such things are not uncommon in In"ian Mar#ets. &1I a!art fromma#ing general rules for %hole mar#et maintains a strict vigil of in"ivi"ual com!anies base" oninformation receive" by it through com!laints an" "isclosure.

&1I's basic functions

0. Regulates &toc# 1(changes.2. Registering an" regulating the %or#ing of interme"iaries li#e stoc# bro#ers sub*bro#ers share

transfer agents ban#ers to Issues an" other such !ersons involve" in share mar#et.3. Registering an" regulating 5ollective investment schemes mutual fun"s venture ca!ital fun"s

etc.

. Prohibiting frau"ulent an" unfair tra"e !ractices relating to securities mar#ets. Prohibiting insi"er tra"ing in securitiesC. Promoting investors' e"ucation an" training of interme"iaries of securities mar#ets.J. 5ontrols an" regulates FIIs?. 1nsure 5or!orate Governance

1very com!any %illing to get liste" has to enter into a Alisting agreement' %ith &1I in %hichcom!any agrees certain terms an" con"itions in Interest of investors. 5lause of AListing agreement'is s!ecifically "irecte" to%ar"s A5or!orate Governance' for it re$uires com!anies to a!!oint certainin"e!en"ent "irectors.

Recently by &ecurities La%s -amen"ment/ bill !o%ers of &1I over collective investment schemes

%ere increase". It %as given authority to attach !ro!erties of non*com!laint com!anies. ,his %asrelate" &ara"ha &cam.

In &ahara case it came out that &1I has !o%er to regulate any com!any %hich issues an" security.Prior !osition %as that it only ha" !o%ers over liste" com!anies.

orporate ,o"ernance

>hat is cor!orate governance

5G conce!t hol"s that com!any shoul" not ignore interest of its any sta#ehol"er. Main sta#ehol"ers areinvestors em!loyees government an" society at large.

0. Investor's interest: etter Returns ,rans!arency accountability in business secure future of

com!any.2. 1m!loyees Interest: Regular salaries goo" %or#ing con"itions 5areer !rogress !otential an"

social status.3. interest: Regular !ayment of ta(es 5om!liance %ith la%s rules 6on in"ulgence in anti*

national activities.. &ociety's Interest: generation of em!loyment less !ollution efficient utilization of scarce

resources 9ealthy affor"able !ro"ucts etc.


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&1I's role in safeguar"ing interest of investors an" curbing mal!ractices is significant from !oint ofvie% of 5or!orate Governance.

+!art from this 5om!anies act 2803 too gives soun" stress on 5G It !rovi"es for a!!ointment ofIn"e!en"ent "irectors Regulates remuneration of "irectors Internal +u"it 5ommittee increasesres!onsibility an" !enalties of au"itors an" !rovi"es that atleast 0 "irector shoul" be %oman.

6e% com!anies act also intro"uce" man"atory orporate .ocial Responsibilityclause. 1verycom!any having net %orth of ru!ees five hun"re" crore or more or turnover of ru!ees one thousan"crore or more or a net !rofit of ru!ees five crore or more "uring any financial year shall constitute a5or!orate &ocial Res!onsibility 5ommittee of the oar" consisting of three or more "irectors out of%hich at least one "irector shall be an in"e!en"ent "irector.

,hey also nee" to formulate a 5&R !olicy %hich shoul" be continuously monitore". 5om!any shoul"s!en" for 5&R minimum 2 of its average net !rofit "uring !revious three years.

,%o main committees for cor!orate governance in !ast %ere umar Manglam irla 5ommittee in0 an" 6.R. 6arayan Murthy 5ommittee in 2882. Rea" herean" here

Mutual Funds4ifferent shares in the mar#et carry "ifferent #in" an" "egree of ris#s. &o an investors instea" of!utting all eggs in one bas#et "iversifies its !ortfolio. 9e attem!ts to minimize his ris# an" ma(imizereturn by investing in both "ebt an" e$uity an" further %ithin e$uity he !ic#s u! various sectors infra te(tile I, 5ement 9ousing ban#ing etc.

+ normal investor often faces information constraints an" fails to get an a"e$uate !ortfolio. For this!ur!ose there are A+sset Management 5om!anies' %hich forms a fun" by issuing units to the !ublic.,hese units are )ust li#e any other instrument shares or "ebentures. Public !urchases these units an"money reaches +M5. 6o% this +M5 is manne" %ith financial mar#et e(!erts an" they %ill invest thismoney in "ifferent sectors so as to ma(imize returns an" minimize ris#. +s !rofit from "ifferentinvestment flo%s value of units of mutual fun" increases. ,hese units are also tra"e" on stoc#e(changes.

,he mutual fun" in"ustry in In"ia %as starte" in 0C3 %ith the formation of 7nit ,rust of In"ia -7,I/at the initiative of the government of In"ia an" Reserve an#. ,he history of mutual fun"s in In"ia canbe broa"ly "ivi"e" into "ifferent !hases. In the first !hase 7,I has en)oye" the status of mono!oly inthe mutual fun" in"ustry. In the secon" !hase some !ublic sector mutual fun"s set u! by the !ublicsector ban#s an" Life Insurance 5or!oration of In"ia -LI5/ an" General Insurance 5or!oration of In"ia-GI5/ %ere launche" besi"es the 7,I. In the thir" !hase %hich starte" in 03 the governmentallo%e" !rivate !layers to offer mutual fun" schemes giving the In"ian investors a %i"er choice of fun"families.

orporate Debt1bond Mar8et in %ndia

+s %e have rea" resource for investment can be either mobilize" in form of either 1$uity or 4ebt.Foregone "iscussion %as for e$uity. +ny business !refers to get finance" first from internal sources li#e!rofit from its o%n o!eration or ca!ital infuse" by its o%ners. &econ" comes the "ebt an" e$uity is!referre" only if "ebt is unavailable. ,his is because e$uity gets Ashare of !rofit' in return %hile "ebt isentitle" only to fi(e" interest. 6ormally former is significantly higher than latter. &o all over the %orl"coo!erate bon" mar#ets are %ell "evelo!e". In this cor!orates raise e$uity not by issuing shares but by"ebentures or bon"s on %hich investorsDlen"ers %ill get fi(e" rate of interest. In In"ia government
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bon" mar#et is %ell "evelo!e" an" it has been financing its fiscal "eficit by such bon"s but cor!oratebon" mar#et is $uite laggar".

In In"ia the Government bon" mar#et has e(!erience" a stea"y gro%th over the years "ue to the nee"to finance the fiscal "eficit. ,he Government bon" mar#et %hich is aroun" 3. !er cent of G4P inen"*2808 in In"ia com!ares favourably to most other +sian countries. ,he cor!orate bon" mar#et on

the other han" is )ust 0.C !er cent of G4P in en"*2808 an" small in relation to the economy's size.From 288? to 2808 cor!orate bon" mar#et in In"ia in value terms gre% from SJ.? billion to S2.billion. In com!arison to other countries such as &outh orea -S3?8.C2 billion/ an" 5hina -S 22.8billion/ the In"ian cor!orate bon" mar#et a!!ears to be un"er*"evelo!e". ,he un"er "evelo!ment ofthe cor!orate bon" mar#et in In"ia is not inci"ental an" is mainly attributable to the structure of theIn"ian financial system an" regulatory structure.

5urrently cor!orates an" business get ma)ority -almost all/ of the len"ing from ban#s. an#s aree(!ose" to numerous other ris#s. If ban#'s cre"it is e(!ose" to a ba" com!any -say #ingfisher/ than any"efault by that com!any -in re!ayment/ can cause harm to "e!ositor %ho other%ise %oul"n't haveo!te" to get e(!ose" to this ba" com!any. &o 5or!orate bon" mar#et !rovi"es investors o!tion tochoose their ris# an" return. It also leaves finance %ith ban# to len" to more socially !ro"uctiveventures. Last but not least a com!any %ith goo" re!utation can get chea! finance for its e(!ansion asthis is "irectly from !ublic an" Ami""leman' ban# is eliminate". y same logic investor %ill also getsome%hat better "eal. For cor!orate "ebt mar#et to "evelo! it is im!erative that regulatory mechanismis strengthene" at very first !lace.

5or!orate bon"s mar#ets too have !rimary an" secon"ary "istinction.

Mobili=ation o+ .mall .a"ings in %n"estment

Foregoing "iscussion %as relate" mobilization of savings un"er %hich central ob)ective of savers is )ustto invest an" increase their %ealth. ,here are other forms of savings un"er %hich small "enominations

of savings gets together to form significant investment figures. ,hese are mainly Insurance Provi"entfun" an" !ension &avings -also calle" contractual savings/. ,hese have an im!ortant social securityangle but here focus is on resource mobilization through them. ,hese fun"s have long maturity-re!ayment/ !erio" so they are better !lace" to cater nee" of !ro)ects %ith long gestation !erio"s li#einfrastructure. ut in In"ia the investment !atterns of these fun"s are highly regulate" %ith a biasto%ar"s investment in Government securities. ,here is nee" to "eregulate these long*term fun" sourcesan" formulate !ru"ential norms for such financing. Insurance sector is some%hat contributing to!rivate sector but !ension an" !rovi"ent savings are com!letely government controlle" so the %ill be"iscusse" in ne(t article along %ith government finance.

&avings through these three forms 28*2 of total househol" savings so efficient mobilizationbecomes crucial.

%nsurance

Insurance is service in %hich in"ivi"ual economic ris# is s!rea" over large number of !eo!le. +ny lossthat can be $uantifie" in money can be insure". For e.g. Life Insurance !rovi"es ris# cover on life of a!erson. Life cannot be $uantifie" in itself but economic har"shi!s on survivors of a "ecease"brea"%inner can be un"oubte"ly $uantifie" in money terms so this %ay life insurance can be "one.

9o% in"ivi"ual economic ris# is s!rea" over large number of !eo!le


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In insurance large number of !eo!le !ay !remium an" their ris# gets covere". In case of anymisha!!ening un"er %hich claim can be invo#e" as !er legal agreement= !erson %ill get com!ensate"by Insurance com!any. 6ot all covere" vehicles %ill meet an acci"ent nor all covere" !ersons %ill "ie.ut everyone certainly has ris# of "ying or getting tra!!e" into an acci"ent. &o !remium from all!eo!le un"er ris# is use" to !ay a !erson %ho really met acci"ent or relatives of !erson %ho "ie".

Insurance is highly !rofitable an" cash rich business. Premium is collecte" an" claims are to be !ai"%hen there is ris# materialize". ,he insurance sector has been an im!ortant source of lo% cost fun"s oflong*term maturities all over the %orl". In the In"ian conte(t ho%ever the insurance com!aniesparticularly in li+e insurance a!art from covering ris# are also committed to repayment o+ t'eprincipal 2it' interest alt'oug' 2it' long maturities and t'ereby tend to act as in"estment+unds# Ene of the reasons that this has ha!!ene" is that the a"erage premium c'argedby theinsurance com!anies in In"ia ten"s to be relati"ely 'ig' due to obsolete and rigid actuarialpractices an" inefficient o!erations.

,his is the reason Life Insurance 5or!oration is one of the richest an" omni!resent governmentcom!anies.

-+ctuaries are 1(!erts %ho tries to $uantify ris# in a !articular segment an" "etermine the a!!ro!riate!remium./

Insurance in"ustry is generally classifie" into Life Insurance usiness an" General Insurance. Former%as nationalize" in 08's an" latter in 0J8's. +fter LPG reforms there have been increasinginvolvement of !rivates sector. + %atershe" moment came in 0 %hen Insurance Regulatory an"4evelo!ment +uthority act %as !asse" %hich establish IR4+. ,his in"e!en"ent authority remains ata!e( of Insurance business. ,his %as necessary because government %as #een on !romoting !rivatesector !artici!ation for %hich in"e!en"ent an" efficient regulators are !rere$uisite.

+n or"inance recently has been !romulgate" to allo% F4I u!to in insurance sector. ,his ise(!ecte" to bring much nee"e" fore( 9uman Resource an" "ifferentiate" !ro"ucts in the sector.

5a!ital mar#ets as name suggests mobilize savings to%ar"s !ro"uctive ca!ital assets. 9igh investmentin !rimary mar#et %ill suggest high fi(e" ca!ital formation %hich in turn %ill have all aroun" im!acton em!loyment creation ta( collection an" eventually higher stan"ar" of living. 9o%ever ca!italmar#ets at times can s$ueeze savings from large !ublic to a han"ful of sectors. ,his results in incomeine$ualities. +s %as seen in last "eca"e that much gro%th %as "ue to services sector an" much of theresources got concentrate" into that sector. Government through its !olicy interventions has to ma#esure that any gro%th is inclusive of all sects regions classes of the country it is only then it can besustainable. Ether%ise it %ill receive a bac#lash from "isa"vantage" !eo!le %hich has strongim!lications for !olitical an" economic stability of the country.

@uestions 0. >hat reforms %ere un"erta#en in In"ia to revive its &toc# 1(changes 1(!lain ho% they hel! in

mobilization of resources. -288 %or"s/2. >hat is im!ortance of cor!orate "ebt mar#et -288 %or"s/3. 4o you thin# government shoul" facilitate "evelo!ment of a burgeoning 5or!orate on"

mar#et >hy -288 %or"s/. 9o% "oes Insurance hel!s in mobilization of small savings &houl" F4I allo%e" in Insurance

sector at time %hen "omestic in"ustry is nascent -288 %or"s/
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Mobili=ation o+ Resources 9 7an8ing

$able o+ ontent

0. Intro"uction to resource mobilization2. asic of an#ing3. 1volution of an#ing in In"ia. an#ing an" +griculture. ,y!es of an#sC. Post offices as Financial Interme"iaryJ. Role an" functions of RI?. Priority &ector Len"ing

. &ome other relate" Institutions 4I5G5 hartiya Mahila an# etc.

Resource is anything %hich has some value an" is re$uire" to accom!lish some "esire" ob)ective. Forlife on earth sunlight is the su!reme resource. It gave birth to all other current form of resources such asFuel an" Foo". 9uman beings -an" every creature/ constantly struggle an" arrange for or mobilize

resources they nee". Ever thousan"s of years %e have built evolutionary societies in %hich resourcemobilization its means an" metho"s have also evolve". +ncient barter tra"e %as a system of resourcemobilization an" then later currencies "evelo!e" to facilitate it. For a currency to be acce!table to allit nee"s a strong legitimacy. In ancient times this legitimacy %as !rovi"e" by Monarchies an" no% it is"one by numerous forms of governments.

5entral thing to the conce!t of laisses Faire %as conce!t of resource mobilization only. >hen 1astIn"ia 5om!any collu"e" %ith ritish 1m!ire to get the e(clusive rights to tra"e in the east it create"resentment in ne%ly emerge" ca!italist class. +s %e #no% it %as aroun" this time that +"am &mith in


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his boo# %ealth of nations strongly !itche" for free mar#ets. ,his theory !ro!agate" that Rulingregimes shoul" let resources be "istribute" as !er !rinci!les of "eman" an" su!!ly %ithout anyintervention. Prices of the "ifferent commo"ities or services %ill sen" signals to buyers an" su!!liers asto %hat to consume an" manufacture res!ectively. &hortage %ill shoot u! !rices attracting moreinvestment in !ro"uction an" reverse %ill ha!!en in case of abun"ance. ,his is %hat he calle" Afree

han" of mar#ets'.,his free han" or 5a!italism %ent on un"eterre" for almost 2 centuries %hen finally in 028's therearrive" AGreat economic 4e!ression' in the %est. Hust before this in 00 Russian revolution yiel"e" ane% alternative i"eology of resource mobilization to be calle" socialism an" communism. Great"e!ression "ismantle" the conce!t of free mar#ets. ritish 1conomist Hohn eynes "emonstrate" thatmar#ets %ere amenable to a failure an" since then term Amar#et failure' came in vogue. 9e !rofesse"that government )ob in times of mar#et failure shoul" be to incur AFiscal 4eficit' so that "eman" ineconomy is increase". Fiscal 4eficit -in short/ is e(!en"iture by government over an" above itsearning. &o tra"itionally government ta(e" citizens to fulfil its commitments but no% government %illbe a Anet giver' as e(!en"iture %ill be more than its income. &o this unfol"e" a ne% cha!ter in resourcemobilization an" fiscal "eficit became an all !ervasive mean to cause changes in resource "istribution

to%ar" %ea# an" vulnerable.

y this time an#ing &ystem %as highly evolve". 5a!ital or 4ebt mar#ets Primary an" &econ"arymar#ets of "ifferent things also emerge". ,o!ic of resource mobilization is so central to sub)ecteconomics that everything be it bu"geting ,a(ation &toc# mar#ets self*hel! grou!s +PM5sFinancial Inclusion an" many more are nothing but relate" means or issues. &o every to!ic shoul" berea" #ee!ing this thing in min".

It shoul" be note" that in mo"ern societies all factors of !ro"uction tra"e or service li#e naturalresources human resource energy resource etc. an" their value is re!resente" by currencyDmoney. &ostu"y about "istribution of money in mar#et subsumes all other ty!es of resource "istribution un"er it.

&o the institutions %hich basically facilitate Resource Mobilization are calle" Afinancial Interme"iaries'

-FI/. In last article %e "iscusse" im!ortance of investments. 1ffective Resource mobilization %ill aimat channelizing resources to%ar" most !ro"uctive sectors an" avenues %hich yiel" ma(imum goo" forleast a"vantage" !eo!le. It is !recisely here that "ebate of gro%th vs. "evelo!ment becomes $uiterelevant.

Most im!ortant FI are an#s Insurance 5a!ital Mar#ets an" as %e note" earlier government also tomuch e(tent. &o %e'll try to cover these Interme"iators along %ith relate" current issues.

,his series %ill tentatively inclu"e follo%ing articles

0. an#ing &ector2. Insurance an" 5a!ital Mar#ets3. Government Finance. Financial Inclusion. Monetary an" Fiscal Policy

>e'll try to cover all the relevant to!ics %ith reasonable "e!th connecting them %ith recent"evelo!ments but given the general nature of to!ic it is li#ely that something im!ortant getsunintentionally s#i!!e". Further all these to!ics are $uite interrelate" for e(am!le financial inclusionis a common theme running throughout the to!ic. &o something might have been #e!t "eliberately outof this article to be covere" in ne(t articles.


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Ma#e sure you also rea" these articles alrea"y !resent on Insights -after this/

0. asel 6orms an" &tability2. 6P+s

7an8ing .ector as resource mobili=er

7asic concepts

+ncient money len"ing systems use" to serve a limite" area but current ban#ing systems has goneglobal. 6o% resource mobilization ha!!ens not only in an economy but also beyon" !olitical bor"ers.Ebviously "egree of integration "iffers from country to country as atteste" by after effects of Global

Financial crisis of 288?-"iscusse" latter/.

4ifferent !ersons in an economy have "ifferent ris# a!!etite or ca!acity to ta#e ris#. ut at same timemost im!ortant conce!t of finance is "irect relation of ris# an" returnD!rofit. More is the ris# more isthe !rofit. an#ing system facilitates movement of money from ris# averse !eo!le to ris# rea"y ones.

&ur!lus money you have can be -among many other things/ investe" in &toc# mar#ets or "e!osite" inban#s. an#s guarantee re!ayment of %hole sum along %ith !re agree" interest so there is high "egreeof certainty an" assurance to the "e!ositor. In contrast &toc# e(changes !rovi"e no such assurances=
http://www.insightsonindia.com/2014/06/30/understanding-banking-system-basel-norms-banking-stability/http://www.insightsonindia.com/2014/07/05/banking-system-india-non-performing-assets/http://i0.wp.com/www.insightsonindia.com/wp-content/uploads/2014/12/2.gifhttp://www.insightsonindia.com/2014/06/30/understanding-banking-system-basel-norms-banking-stability/http://www.insightsonindia.com/2014/07/05/banking-system-india-non-performing-assets/


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!erson may not be able to recover even his investe" money. &o ris# averse !erson %ill !refer ban# overstoc# mar#ets !rivate business or any other ris#ier investment. ,his is a hy!othetical scenario.

En the other han" many !eo!le %ho have some #no%le"ge for %hat else to "o of money are rea"y toinvest but they "on't have money. ,hese %ill borro% same money %hich %as )ust "e!osite" by ris#averse !eo!le. &o ban# insures its len"ing to these -so calle"/ ris# rea"y !eo!le by a"e$uate ris#

assessment mortgages or hy!othecation.

In Ris# assessment ban# stu"ies financial ca!acity an" cre"ibility of !otential borro%er. For this itgoes into matters li#e his annual income !ast cre"it history etc. ,erm loans are "isburse" by #ee!ingsome !hysical !ro!erty of borro%er mortgage. 7n"er mortgage ban# #ee!s "ocuments of such !ro!ertyon un"erstan"ing that those %ill be returne" on re!ayment of loan. Loan agreement inclu"es a clausein %hich borro%er authorize ban# to sell !ro!erty on inability of borro%er to re!ay such money. In caseloan is given against a financial asset such as shares or 4ebentures it is calle" A9y!othecation' -notmortgage/.

In the initial !hases of economic "evelo!ment ban#s are main means of resource mobilization in aneconomy. En same lines this is case currently %ith In"ia. ,his is because ma)ority !eo!le in such

economies are too ris# averse. 6e% firms in "evelo!ing economies fin" it "ifficult to raise muchmoney through ca!ital mar#ets an" conse$uently they naturally go to ban#s for loans. +s In"ianeconomy is e(!an"ing ca!ital mar#ets are getting stronger year by year. ,his ma#es ban#ing in"ustry amost im!ortant bac#bone of In"ian economy.

E"olution o+ 7an8ing Nationali=ation and 3ater Pri"ate 3icenses

For the !ast three "eca"es In"ia' s ban#ing system has several outstan"ing achievements to itscre"it. ,he most stri#ing is its e(tensive reach. It is no longer confine" to only metro!olitans orcosmo!olitans in In"ia. In fact In"ian ban#ing system has reache" even to the remote corner sof the country . ,his is one of the main reason of In"ia' s gro%th !rocess.

,he government' s regular !olicy for In"ian ban# since 0C has !ai" rich "ivi"en"s %ith the

nationalization of 0 ma)or !rivate ban#s of In"ia.

,he first ban# in In"ia though conservative %as establishe" in 0J?C. From 0J?C till to"ay the)ourney of In"ian an#ing &ystem can be segregate" into three "istinct !hases. ,hey are asmentione" belo%:

0. 1arly !hase from 0J?C to 0C of In"ian an#s2. 6ationalization of In"ian an#s an" u! to 00 !rior to In"ian ban#ing sector Reforms.3. 6e% !hase of In"ian an#ing &ystem %ith the a"vent of In"ian Financial an#ing &ector

Reforms after 00.

P'ase %

,he AGeneral an# of In"ia' %as set u! in the year 0J?C. 6e(t an# of 9in"ustan an" engalan#. ,he 1ast In"ia 5om!any establishe" an# of engal - 0?8/ an# of ombay - 0?8/ an"an# of Ma"ras - 0?3/ as in"e!en"ent units an" calle" it Presi"ency an#s. ,hese threeban#s %ere amalgamate" in 028 an" Im!erial an# of In"ia %as establishe" %hich starte" as!rivate sharehol"er's ban#s mostly 1uro!eans sharehol"er's. ,his ban# later became A&tate an# ofIn"ia'.

In 0?C +llahaba" an# %as establishe" an" first time e(clusively by In"ians Pun)ab6ational an# Lt". %as set u! in 0? %ith hea"$uarter s at Lahore. et%een 08C an" 003


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an# of In"ia 5entral an# of In"ia an# of aro"a 5anara an# In"ian an# an" an#of Mysore %ere set u!. Reserve an# of In"ia came in 03 -it %as first government com!any/.

4uring the first !hase the gro%th %as very slo% an" ban#s also e(!erience" !er io"ic failuresbet%een 003 an" 0?. ,here %ere a!!ro(imately 0088 ban#s mostly small. ,o streamlinethe functioning an" activities of commercial ban#s the Government of In"ia came u! %ith

,he an#ing 5om!anies +ct 0 %hich %as later change" to an#ing Regulation +ct 0as !er amen"ing +ct of 0C. +s !er this Reserve an# of In"ia %as veste" %ith e(tensive!o%ers for the su!ervision of ban#ing in In"ia as the 5entral an#ing +uthority.

4uring those "ays !ublic has lesser confi"ence in the ban#s. +s an aftermath "e!ositmobilization %as slo%. +breast of it the savings ban# facility !rovi"e" by the

Postal "e!artment %as com!aratively safer. Moreover fun"s %ere largely given to tra"ers.

P'ase %%

Government too# ma)or ste!s in this In"ian an#ing &ector Reform after in"e!en"ence. In 0it nationalize" Im!erial an# of In"ia %ith e(tensive ban#ing facilities on a large scale es!ecially in

rural an" semi* urban areas. It forme" &tate an# of In"ia to act as the !rinci!al agent ofReserve an# of In"ia an" to han"le ban#ing transactions of the 7nion an" &tate Governments allover the country.

&even ban#s forming subsi"iary of &tate an# of In"ia %as nationalize" in 0. + ma)or!rocess of nationalization %as carrie" out %hen in 0C 0 ma)or commercial ban#s in the country%ere nationalize".

&econ" !hase of nationalization In"ian an#ing &ector Reform %as carrie" out in 0?8 %ithseven more ban#s. ,his ste! brought ?8 of the ban#ing segment in In"ia un"er Governmento%ner shi!.

,he follo%ing are the ste!s ta#en by the Government of In"ia to Regulate an#ing Institutions in the

5ountry:0: 1nactment of an#ing Regulation +ct.

0: 6ationalization of &tate an# of In"ia.

0: 6ationalization of &I subsi"iaries.

0C0: Insurance cover e(ten"e" to "e!osits.

0C: 6ationalization of 0 ma)or ban#s.

0J0: 5reation of cre"it guarantee cor!oration.

0J: 5reation of regional rural ban#s.

0?8: 6ationalization of seven ban#s %ith "e!osits over 288 crore.

an#ing in the sunshine of Government o%nershi! gave the !ublic im!licit faith an" immenseconfi"ence about the sustainability of these institutions.

P'ase %%%

,his !hase has intro"uce" many more !ro"ucts an" facilities in the ban#ing sector in itsreforms measure. In 00 a 5ommittee %as set u! %hich %or#e" for the liberalization of ban#ing


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!ractices. Phone ban#ing an" net ban#ing is intro"uce". ,he entire system became more convenientan" s%ift. ,ime is given more im!ortance than money#

7an8ing and 5griculture

In the !ast farming %as carrie" out in a tra"itional %ay. It %as a subsi"ence farming an" %as more orless self*sufficient an" 5re"it nee"s of the farmer %ere limite" an" %ere met %ith mostly by themoney len"ers relatives frien"s an" to some e(ten" by ,accavi loans from Government.Money len"ers use" to e(!loit the farmers in various %ays li#e e(orbitant rates of interest false"ocuments etc.

>ith government intervention share of Ainstitutionalize" cre"it' in total farm cre"it has raise"substantially. 9o%ever it is sai" that after reforms of 00 ratio institutionalize" cre"it has gone "o%n.-Institutional cre"it is one %hich is borro%e" by farmers from institutions that are monitore" bygovernment agencies/

+fter in"e!en"ence an" !articularly after the Green Revolution agriculture entere" the era of mo"ernization an" the cre"it nee"s of the farming community starte" increasing. In the !resent"ay mar#et oriente" farming the cre"it has become one of the crucial in!uts.

+ changing environment an" government !olicies are forcing ban#s to len" more to theagricultural sector . oth !rivate an" !ublic ban#s are no% involving themselves in a lot ofagri* base" len"ing activities. esi"es financing tra"itional activities ban#s are also involve" intraining an" setting u! consultancies agri clinics the e(!ort an" mar#eting of agricultural !ro"uceetc.

&!ecialize" loans - li#e horticulture a$uaculture animal husban"ry floriculture an" sericulturebusinesses/ to meet s!ecific nee"s of the farmer s are offere" by the ban#s. ,he Farmers canbenefit from these loans by timely a!!roach an" !rom!t re!ayment.

$ypes o+ 7an8s

R7% classi+y ban8s as

ommercial 7an8srefer to bot' sc'eduled and non-sc'eduled commercial ban8s%hich areregulate" un"er an#ing Regulation +ct 0.

0. .c'eduled ommercial 7an8s are grouped under +ollo2ing categories:

-,hose ban#s %hich are inclu"e" un"er second sc'edule o+ R7% act o+ 9Aan" %hose !ai" u! ca!italan" fun"s collecte" are not less than Rs. La#h. Further they must not involve themselves in anyactivity %hich a"versely affects interests of "e!ositors./

0. &tate an# of In"ia an" its +ssociates2. Ether 6ationalize" an#s

3. Foreign an#sForeign ban#s can either o!en their branch in In"ia or they can o!en %holly o%ne" subsi"iary - >E&/.>E& is a com!any in %hich 088 shares are hel" by !arent com!any. RI as !er current !olicy is!romoting >E& route. ,his is because of a!!rehensions of %estern financial crisis. ranch officeremains more "e!en"ent an" un"er control of hea" office %hereas >E& en)oys much autonomy an" isto some e(tent more immune from any !roblems of !arent com!any or home country.

In case of branch J F4I is allo%e" an" in case of >E& 088 F4I is allo%e". >E& also receivesnear national treatment. ,hey are allo%e" to o!en branches any%here in In"ia -e(ce!t certain sensitive
http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2758http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2758


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areas/

,here %ere concerns that too much reliance on foreign ban#s can com!romise long term security an"sovereignty of In"ia to a""ress these it is !rovi"e" that ca!ital an" reserves in han" of foreigncom!anies shall not go beyon" 28 of ca!ital an" reserves of national ban#ing system.

. Regional Rural an#s -RR / *

RRs %ere establishe" in 0J %ith a vie% to de"elop t'e rural economyan" to create asu!!lementary channel to the


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+ co-operati"e ban8is a financial entity %hich belongs to its members %ho are at the same time theo%ners an" the customers of their ban#. ,his is %estern conce!t %hich came in In beginning of 088's.Initial ca!ital of these ban#s is contribute" by RI state an" 5entral government in "ifferent rations.5oo!erative ban#s o!erate on !rinci!le of no !rofit an" no loss. &o they are instrumental in "ismantlinghegemony of money len"ers in rural finance.

5oo!erative ban#s constitute" about ?8 of institutional cre"it in 0C8's %hen nationalization "rive%as yet to start. ut after nationalization they face stiff com!etition from commercial ban#s an" theirshare has gone "o%n substantially. 5oo!erative ban#s can sche"ule" or non*sche"ule".

+s initial investment comes from RI an" government these ban#s suffer high "egree of outsi"einterference. 5oo!erative ban#s in In"ia are not coo!erative in s!irit. ,here is nee" to !romote ban#s in%hich o%nershi! an" management is actually in han" of !eo!le. ,his if su!!orte" by !olicy ma#es %illle" to mushrooming of coo!erative ban#s in far flung areas !urely on base of local "eman" an" su!!ly.It is %ell #no%n that our rural areas are generally self*sufficient an" it is intervention of outsi"emar#ets %hich results in "istortions.

,here are "ifferent ty!es of coo!erative ban#s such as Primary +griculture 5re"it &ocieties -P+5&/&tate or centre lan" "evelo!ment ban#s -&L4D5L4/ 7rban or rural 5oo!erative an#s-75DR5/.

Rural coo!eratives structure -un"er su!er vision of 6++R4/ is bifurcate" into short*term an" long*term structure. ,he short*term coo!erative structure is a three*tier structure %ith &tate 5oo!erativean#s -&5s/ at the a!e( -&tate/ level 4istrict 5entral 5oo!erative an#s -455s/ at theinterme"iate -"istrict/ level an" Primary +gricultural 5re"it &ocieties -P+5&/ at the groun" -village/level. ,he short term structure caters !rimarily to the various short D me"ium*term !ro"uction an"mar#eting cre"it nee"s for agriculture.

&imilarly long*term coo!erative structure has the &tate 5oo!erative +griculture an" Rural4evelo!ment an#s at the a!e( level an" the Primary 5oo!erative +griculture an" Rural 4evelo!ment

an#s at the "istrict or bloc# level. ,hese institutions %ere conceive" %ith the ob)ective of meetinglong*term cre"it nee"s in agriculture.

,here are currently aroun" 3888 coo!erative ban#s among them huge ma)ority is ofP+5&. ,hiscollectively forms bac#bone of rural ban#ing system.

Post B++ices as Financial %ntermediary

In"ia Postis un"oubte"ly ol"est an" largest organization in In"ia involve" in resource mobilization. Ithas huge net%or# of 0. la#h !ost offices about 2. la#h "a# seva#s -!ostmen/ an" la#h em!loyees .
http://en.wikipedia.org/wiki/Primary_Agricultural_Credit_Societyhttp://www.yourarticlelibrary.com/banking/land-development-banks-in-india-structure-working-and-progress-of-ldbs/26343/http://www.rbi.org.in/scripts/fun_urban.aspxhttp://en.wikipedia.org/wiki/Primary_Agricultural_Credit_Societyhttp://en.wikipedia.org/wiki/Primary_Agricultural_Credit_Societyhttp://www.indiapost.gov.in/Financial_Services.aspxhttp://i0.wp.com/www.insightsonindia.com/wp-content/uploads/2014/12/3.jpghttp://en.wikipedia.org/wiki/Primary_Agricultural_Credit_Societyhttp://www.yourarticlelibrary.com/banking/land-development-banks-in-india-structure-working-and-progress-of-ldbs/26343/http://www.rbi.org.in/scripts/fun_urban.aspxhttp://en.wikipedia.org/wiki/Primary_Agricultural_Credit_Societyhttp://www.indiapost.gov.in/Financial_Services.aspx


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+mong these 8 are o!erating in rural areas. >ith a"vent of other mo"es of communicationim!ortance of In"ia Post as foun"ation of In"ian communication net%or# has colla!se". ut it remains$uite relevant for %i"e array of Afinancial services' it !rovi"es such as saving an" other time "e!ositaccounts Public !rovi"ent fun" Monthly Investment schemes 6ational saving certificates. -ut itcan't !rovi"e current accounts/

It comes to rescue government %hen ban#ing system is not able to "eliver cash benefits such as un"er6R1G+ El" ageD>i"o%D"isability Pension &chemes etc. In fact In"ia !ost a!!lie" for ban#inglicence this year but RI "eferre" a!!lication saying that In"ia Post shoul" se!arately consultgovernment -finance Ministry/ for the !ur!ose.

If it is grante" ban#ing licence then 0 thousan" branches %ill become ban# branches an" In"ia !ost%ill have to a"here to RI gui"elines on 5RR &LR Priority &ector Len"ing an" 5a!ital +"e$uacyRatio. 5urrently In"ia Post only Aacce!t "e!osits' it can't len". In or"er to be a ban# organization %illnee" to be infuse" %ith magnificent sums of ca!ital.

ut given its "ee! !enetration in rural In"ia there is strong case for its full*fle"ge" foray intoban#ing.

It is sai" that organization hol"s aroun" Rs la#hs of 4e!osits an" Rs C la#h saving certificates. utthese "e!osits get interest rate as lo% as .

Role and +unctions o+ Reser"e 7an8 o+ %ndia

In 02C 9ilton*Qoung 5ommission recommen"e" the creation of a central ban# for In"ia to se!aratethe control o+ currency and credit from the Government an" to augment ban#ing facilities throughoutthe country. ,he Reserve an# of In"ia +ct of 03 establishe" the Reserve an# an" set in motion aseries of actions culminating in the start of o!erations in 03. &ince then the Reserve an#'s role an"functions have un"ergone numerous changes as the nature of the In"ian economy an" financial sectorchange".

$'e +unctions o+ t'e Reser"e 7an8 today can be categori=ed as +ollo2s:

0. Monetary !olicy

,he ob)ectives of monetary !olicy in In"ia have evolve" to inclu"e maintaining price stabilityensuring ade4uate +lo2 o+ creditto !ro"uctive sectors of the economy for su!!orting economicgro%th an" ac'ie"ing +inancial stability.

,he Governor of the Reserve an# announces the Monetary Policy in +!ril every year for the financialyear that en"s in the follo%ing March. ,his is follo%e" by bi monthly !olicy revie%s in %hich overallmacroeconomic stability is sought to be ensure" by tin#ering %ith means such as 5RR &LR an" M&Fetc.

Qear 280 sa% ma)or changes in monetary !olicy. 1arlier there %as revie% every "ays it %as

increase" to C8 "ays so that im!act of changes in !olicy is clearly visible an" nee" for further actionscoul" be !ro!erly gauge". Further 7r)it Patel 5ommittee recommen"e" use of AInflation targeting' for!ur!ose of monetary !olicy instea" of !revious Amulti!le in"icators' regime. -More on this later/ &ono% RI's monetary !olicy is solely base" to target Inflation in the economy.

2. Regulation an" su!ervision of the ban#ing an" non*ban#ing financial institutions.

,ra"itionally the Reserve an#'s regulatory an" su!ervisory !olicy initiatives are aime" at !rotectionof the "e!ositors' interests or"erly "evelo!ment an" con"uct of ban#ing o!erations an" li$ui"ity an"


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solvency of ban#s. 1fficiency of RI's regulation an" su!ervision is atteste" by the fact that In"ianban#ing system almost remaine" untouche" by recent global ban#ing crisis.

3. Regulation of money fore( an" government securities mar#ets an" also certain financial"erivatives. It interacts %ith other institutions li#e &1I an" FM5 an" some time comes intoconflict %ith them.

. an#er 4ebt an" cash management for 5entral an" &tate Governments

,he Reserve an# of In"ia +ct 03 re$uires the 5entral Government to entrust the Reserve an#%ith all its money remittance e(change an" ban#ing transactions in In"ia an" the management of its!ublic "ebt.

,he Reserve an# may also by agreement act as the ban#er to a &tate Government. 5urrently theReserve an# acts as ban#er to all the &tate Governments in In"ia e(ce!t Hammu ashmir an"&i##im. It has limite" agreements for the management of the !ublic "ebt of these t%o &tateGovernments.

-Ether relevant things such as management of !ublic "ebt etc. %ill be "iscusse" in articles on fiscal!olicy an" Government bu"geting/

. Management of foreign e(change reserves

,he Reserve an# as the custo"ian of the country's foreign e(change reserves is veste" %ith theres!onsibility of managing their investment. In recent years flo% an" volatility of fore( reserves haveincrease" substantially an" this has ma"e RI )ob to !reserve Areal value' of reserves highlyso!histicate".

>'ere our Forex reser"es are in"ested? 6its not at all 8ept in loc8ers)

,he Reserve an# of In"ia +ct !ermits the Reserve an# to invest the reserves in the follo%ing ty!esof instruments:

4e!osits %ith an# for International &ettlements an" other central ban#s

4e!osits %ith foreign commercial ban#s

4ebt instruments re!resenting sovereign or sovereign*guarantee" liability of not more than 08

years of resi"ual maturity Ether instruments an" institutions as a!!rove" by the 5entral oar" of the Reserve an# in

accor"ance %ith the !rovisions of the +ct 5ertain ty!es of "erivatives

,he Reserve an#'s a!!roach to foreign e(change reserves management has also un"ergone a change.7ntil the balance of !ayments crisis of 00 In"ia's a!!roach to foreign e(change reserves %asessentially aime" at maintaining an a!!ro!riate im!ort cover. ,he committee stresse" the nee" tomaintain sufficient reserves to meet all e(ternal !ayment obligations ensure a reasonable level of

confi"ence in the international community about In"ia's ca!acity to honor its obligations an" counters!eculative ten"encies in the mar#et. +fter the intro"uction of system of mar#et*"etermine" e(changerates in 03 the ob)ective of smoothening out the volatility in the e(change rates assume" im!ortance.It %as in this bac#"ro! that foreign 1(change Management act %as re!ealing regulation act %hich %asmuch stringent.

C. an#er to ban#s * an#s are re$uire" to maintain a !ortion of their "eman" an" time liabilitiesas cash reserves %ith the Reserve an# thus necessitating a nee" for maintaining accounts %ith


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+!art from this RI is licensing authority for !rivate an" foreign ban#s. It ensures cor!orategovernance in an#ing 5om!anies. It guar"s ban#s from mar#et ris#s an" gui"es ban#s to a"o!t lo%ris# a!!roaches. Lastly it has im!ortant "evelo!ment role of ensuring financial Inclusion.

Priority sector lending

Priority sector refers to those sectors of the economy %hich may not get timely an" a"e$uate cre"it inthe absence of this s!ecial "is!ensation. ,y!ically these are small value loans to farmers for agriculturean" allie" activities micro an" small enter!rises !oor !eo!le for housing stu"ents for e"ucation an"other lo% income grou!s an" %ea#er sections.

Priority &ector inclu"es the follo%ing categories:

0. +griculture2. Micro an" &mall enter!rises3. 1"ucation. 9ousing

. 1(!ort 5re"itC. Ethers

,otal target for ban#s is to len" 8 of their total len"ing to !riority sector. Eut of this 8 0? shoul"be in agriculture an" 08 to %ea#er sections. Rea" more

In 280 6achi#et Mor committee recommen"e" to increase this P&L ration to 8. It shoul" be note"that P&L man"ates len"ing to borro%er %ho may not be other%ise cre"it %orthy. ,his increases 6P+'san" a" "ebts of the ban#s. In turn ban#s %ill !ass on these costs to other borro%ers. ,his %ay it may!ush u! general rates of Interests. 9igh rate of interest results in Afinancial 1(clusion' instea" "efeating%hole !ur!ose of P&L %hich is Financial Inclusion.

Deposit %nsurance and redit ,uarantee orporation 6D%,)

+s the name suggests it has t%o functions *

4e!osit insurance %hen money is "e!osite" in ban# there's al%ays mar#et ris# -may be

negligible/ that ban# %ill not be able to re!ay "e!osit %hen "ue or %hen "eman"e". ,o instillconfi"ence in "e!ositors about ban#ing system it is im!erative to insure their "e!osits. 4I5G5maintains a A4e!osits Insurance Fun"' for the !ur!ose. Interestingly !remium in these ban#s forthis insurance is given by ban#s an" not by "e!ositors. In this case 4I5G5 is serving !ublic's-"e!ositor's/ interest.

5re"it Guarantee in this case 4I5G5 aims to cover cre"it ris# of ban#. ,his im!lies that ban#

is insure" against a" 4ebts or 6P+s going into loss. For this it maintains a Acre"it guaranteefun"'

,hese functions initially %ere un"er t%o se!arate organizations but latter they both %ere merge". It is%holly o%ne" subsi"iary of RI.

5ll %ndia Financial %nstitutions $'ese are under +ull control and super"ision o+ R7%

0. Exim 7an82. National 7an8 +or 5griculture and Rural De"elopment 6N575RD)

It has been accre"ite" %ith matters concerning !olicy !lanning an" o!erations in the fiel" of cre"it
http://www.rbi.org.in/scripts/FAQView.aspx?Id=87http://www.rbi.org.in/scripts/FAQView.aspx?Id=87


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for agriculture an" other economic activities in rural areas in In"ia. RI sol" its sta#e in 6++R4 tothe Government of In"ia %hich no% hol"s sta#e. 6++R4 is active in "evelo!ing financialinclusion !olicy an" is a member of the +lliance for Financial Inclusion

3. National Cousing 7an8 6NC7). .mall %ndustries De"elopment 7an8 o+ %ndia 6.%D7%)

Non-7an8ing Finance ompanies 6N7Fs)

6on*ban#ing Financial 5om!anies !lay an im!ortant role in the financial system. +n 6F5 is "efine"as a com!any engage" in the business of len"ing investment in shares an" securities hire !urchasechit fun" insurance or collection of monies. 4e!en"ing u!on the line of activity 6F5s arecategorize" into "ifferent ty!es. Recognizing the gro%th in the sector initially the regulatory set*u!!rimarily focuse" on the "e!osit ta#ing activity in terms of limits an" interest rate. ,hese com!aniescannot o!en current accounts an" issue 5he$ue boo#s.

7'artiya Ma'ila 7an8

haratiya Mahila an# Lt" is the first of its #in" in the an#ing In"ustry in In"ia forme" %ith a vision

of economic em!o%erment for %omen. an# receive" license from RI on se!t 2803>hile the an# focuses on the entire !yrami" of In"ian %omen s!ecial attention is sought to be givento economically neglecte" "e!rive" "iscriminate" un"erban#e" unban#e" rural an" urban %omen toensure inclusive an" sustainable gro%th.

,he an# has "esigne" many %omen centric !ro"ucts #ee!ing in min" the core strengths of %omen soas to enable them to unleash their hi""en !otentials engage in economic activities an" contribute to theeconomic gro%th of the country. Most of the !ro"ucts are offere" %ith a concession in the rate ofinterest for %omen customers.

From seven branches in 4ecember 2803 the M is no% loo#ing to cross ?8 this year %ith ne% onesin ochi 4hol!ur an" other !laces. It alrea"y has a !resence in 23 states. ,he an# is slo%ly emerging

as a chief o!tion for %omen to get cre"it on easier terms than commercial ban#s. It len"s money to%omen %ho set u! small businesses beauty !arlors "ay care centers an" home base" initiatives an"customers get upto Rs one crore 2it'out a credit guarantee-mortgage or hy!othecation/. ,hey onlyhave to ta#e an insurance !olicy un"er the government's redit ,uarantee Fund $rust.c'eme-%hich is for M&M1s/ an" !ay an annual !remium. -&o its collateral free cre"it is not insure" by4I5G5 but by 5GF,&/

+s it is #no%n that at time of in"e!en"ence there %as very limite" resource mobilization. Reasonobviously %as lac# !ro!er s!ecialize" institutions. >ith continuous efforts of RI an" FinanceMinistry to"ay there is highly so!histicate" an" s!ecialize" ban#ing system. 9ere is evolution timelineof various !arts of this humungous system *

0C2: 4e!osit Insurance 5or!oration0C3: +gricultural Refinance 5or!oration

0C: 7nit ,rust of In"ia

0C: In"ustrial 4evelo!ment an# of In"ia

0C: 6ational Institute of an# Management

0J0: 5re"it Guarantee 5or!oration
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0J?: 4e!osit Insurance an" 5re"it Guarantee 5or!oration -,he 4I5 an" 5G5 %ere merge" an"rename" as 4I5G5/

0?2: 6ational an#for +griculture an" Rural 4evelo!ment -It re!lace" the +gricultu

insight economics

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