India has grown at an average rate of 5.7 % for the last 20 years. In per-capita terms, income growth has accelerated from the Hindu rate of less than 1 % prior to the eighties, to 3.7 % per annum since 1980-81. These National Account estimates have been provided by the Central Statistical Organization and are accepted as the approximate truth by all government bodies, domestic and international, non-government bodies and researchers and analysts around the world.
India initiated major economic reforms by adopting the New Economic Policy in 1991 following a major balance of payments crisis which saw its GDP growth rate drop to 0.4% from an average level of above 6 percent in the preceding five years. For a decade now, the policy makers have focused their attention exclusively on the real sector of the economy. Liberalization has had its effect on trade where imports have been liberalized and weighted tariff rates brought down from a level of 128% in 1990 to about 30% today. Industry has witnessed de-regulation of the licensing regime. But the financial sector has been ignored in the “first generation” reforms package. It remains the most under-reformed sector of the Indian economy and the over-regulated nature of the financial markets has been the major stumbling block in putting the economy on a higher growth path.
This paper is about the functioning of capital markets in India. It is not an exaggeration to state that the Indian capital market remains the most under-reformed sector of the Indian economy – and its most uncompetitive. One of the salient lessons of the East Asian crisis was the signal given to policymakers – capital markets can only be ignored at the economy’s peril. India’s East Asian neighbors are in a capital market reform overdrive, and will soon have transparent, efficient and productive, capital markets. The question remains – will India again lag behind?
