ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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Reforms against Realities

THAT the financial system should be in disarray after five years of orthodox stabilisation and structural adjustment programmes is not surprising. For one thing, the financial sector mirrors disturbances originating in the real sectors of the economy. The freeing of export-import trade, the attempt to leave the exchange rate to be determined by market forces, liberal import of gold and silver, the continued fragility of the balance of payments, the ebb and flow of volatile and high- cost foreign portfolio investment and the persistence of large revenue and fiscal deficits of the central government necessitating huge borrowing, have all been reflected in depressed household financial saving and overall financial sector behaviour. That apart, developments within the financial system have made their own contribution to the system's distortions and uncertainties. Of all the stabilisation and structural adjustment programmes, the so-called financial sector reform has been the most flawed in terms of its motivations, absence of initial preconditions and poor sequencing. Market failures, it is well known, are most pervasive in the financial markets and in the case of the Indian economy, the vast agricultural base and the preponderance of small enterprises call for active policy intervention to ensure that large enterprises, real estate speculators, sharebrokers and upper class consumers do not pre-empt credit and that banks and other financial institutions actively assist agriculture and small enterprises. Regulation of interest rates on deposits and advances has to be an essential part of such intervention. While higher domestic saving, in financial form specifically, is a sine qua non of rapid agricultural and industrial development, beyond a point high interest rates do not augment saving, but only put a premium on portfolio switching by households and companies and on treasury operations by financial intermediaries, leading to high cost of capital to the final user and neglect of productive lending.

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