India is today the fastest growing economy in the world. Achievement of this status would not have been possible if India had not embarked on a reformation process in the 1990s. The past 25 years saw the launch of major structural reforms in the Indian financial landscape, with its transformative effects continuing today and reaching out into the future. Be it in the domains of capital markets, banking or insurance, the continuing economic and financial reforms have kept the India growth story an upbeat one despite several global crises impacting on us, like the Asian crisis of 1997-98, the global financial crisis of 2008,the Euro sovereign debt crisis and many many others. S Ravi, maven of finance, banking and sectoral growth, charts out this reform journey of the Indian economy over the decades, prognosticating into the near future.
1991 was indeed a watershed year, when the first tendrils of economic liberalisation began doing away with the ‘Licence Raj,’ reducing tariffs, deregulating interest rates, dismantling directed credit, improving the banking system and ending many public monopolies. Allowing automatic approval of FDI (foreign direct investment) in many sectors paved the way for India progressing towards a free-market economy and deep financial sector reforms. The fundamental objective of the financial sector reforms of the 1990s was to create an effective, competitive and steady system that could fuel development. During 1990 to 1999, India saw the setting up of SEBI (the Securities Exchange Board of India), RBI allowing Private sector n participation in Banking, and the passage of the IRDA Act 1999, which facilitated establishment of an insurance sector regulator. This was also the period when the taxation on services was introduced to 5%.
In the first decade of this century, banking sector reforms enabled India’s bankers to raise funds from the equity market, saw the strengthening of prudential norms and the setting up of a “Board for Financial Supervision” within the RBI, to attend exclusively to supervisory functions. Then came the restructuring and reform of security interest laws in the country, particularly the passing of the “Securitisation & Reconstruction of Financial Assets” and the “Enforcement of Security Interest Act, 2002 (SARFESI),” not to mention the strengthening of the IT platform.
Capital and securities markets have been subject to transformation, with amendment of “The Securities Contracts Regulation Act, 1956,” to include securitisation instruments under the definition of “securities” and disclosure based regulation for issue of the securitised instruments and the procedure thereof. This reform facilitated the development of a securitised debt market, critical for meeting the humongous requirements of a burgeoning infrastructure sector. Stock Derivatives introduced in 2000 smoothed the way for the entry of FIIs and Domestic Institutional players in the Indian Market. SEBI made it compulsory for companies coming out with IPOs to get their offerings graded by at least one credit rating agency registered with SEBI, so as to provide the investor with an informed and objective opinion expressed by a professional rating agency. In an effort to streamline the disclosures while also taking into account changes in market design, the erstwhile SEBI (Disclosure and Investor Protection) guidelines governing public offerings were replaced by the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
IRDA was incorporated as a statutory body in April 2000 and brought about several crucial policy changes. This Authority has notified many Regulations on various issues like Registration of Insurers, Registration of Insurance agents, Re-insurance, solvency margin, obligation of insurers to rural and social sector etc. India allowed private players into its insurance sector in 2000, setting a limit on FDI to 26%. The major landmark in state level tax reform was rationalizing and simplifying the sales tax system with the introduction of Value Added Tax (VAT) in 21 states in 2005. Further, use of Information Technology simplified & improved aspect of tax deposit, filing and compliance.
The last decade and a half saw policy makers focusing on ‘Financial Inclusion’ of Indian rural and semi-rural populations primarily to meet three very pressing needs – the creation of a platform to inculcate the habit to save money, the provision of formal credit avenues, and to effectively plug gaps/leaks in public subsidies and welfare programmes. In order to expedite financial inclusion, differentiated banks serving niche interests, local area banks, payment banks et al., have been given ‘in-principle licenses’ to meet credit and remittance needs of small businesses, the unorganised sector, low income households, farmers and India’s large migrant work force.
- On 19 August 2015, the RBI gave “in-principle” licences to eleven entities to launch payments banks which include major groups like Aditya Birla Nuvo, Airtel, Reliance Industries, Department of Posts, etc.
- On 16th September, RBI short-listed 10 micro-lenders to set up small banks for advancing loans primarily to the unbanked, small businesses and farmers, micro and small industries and unorganised sector entities which do not have access to finance from larger banks. Of the 10 entities granted in-principle approval to transform into banks, eight are microfinance providers, one a local area bank and one a non-banking finance company.
In order to strengthen and clean-up the balance-sheets of banks, RBI has introduced a host of initiatives like “Strategic Debt Restructuring (SDR)”, “S4A” and “5:25” schemes that allow banks to convert debt into equity and take over management, bifurcate outstanding debt into sustainable debt and equity/quasi-equity, and extend long-term loans of 20-25 years to match the cash flow of projects, while refinancing them every five or seven years respectively.
The securities market also witnessed a transformation on account of:
- The SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, issued on 2nd September 2015 replacing the earlier Listing agreements with an objective of combining and rationalizing earlier listing agreements for different segments of the capital market into one single document across various types of securities listed on stock exchanges. This has eased IPO procedures considerably.
- The SEBI (Real Estate Investment Trusts) Regulations, 2014, towards regulating investments in REITS. Many real estate bigwigs are working towards a potential listing of their REITs on Indian bourses after the union budget provided dividend distribution tax relief to the trusts.
- The Forwards Markets Commission merged with SEBI with effect from 28 September 2015, creating a unified regulator for commodities and capital markets. This will help streamline monitoring of commodity futures trading and curb wild speculations in the market.
- SEBI allowing ‘Options Contracts’ in Commodity Trading.
- SEBI allowing Foreign Portfolio Investors to invest in units of REITs, infrastructure investment trusts (InvITs), category III Alternative Investment Funds (AIFs), and also permitting them to acquire corporate bonds under default.
Coming to the here and the now, the Cabinet, headed by PM Narendra Modi, has lately approved advancing the presentation of the annual Budget by a month, scrapped the over nine-decade-old tradition of having a separate Railway Budget, and removed classifications for expenditure to make the exercise simpler. This major overhaul has been done with a view to get all the legislative approvals for annual spending and tax proposals before the beginning of the new financial year on April 1. To facilitate this, the Budget Session of Parliament will now be called sometime before January 25, a month ahead of current practice. Advancing of the budget presentation will provide states with a better timeframe to implement schemes. The merger of the railway budget will save precious time in Parliament by not having to hold separate consideration and passing of two Appropriation bills. Furthermore, when the Rail budget had to be introduced separately in the past, the railways needed to pay an annual dividend to render its budgetary support to the government. It will now be free of this and the same fund could now be used in better ways for improving conditions of the Indian railway behemoth.
The GST, apropos, is one of the greatest reforms that have been ushered in so far over the decades, and has now seen ratification by more than 50 percent of the state legislatures. This is expected to substitute all indirect taxes levied on goods and services by the Centre and States, and is to be implemented by April 2017. GST implementation would be a real game changing reform for the Indian financial system and economy, as it would create a common market and decrease the incidence of tax at various points. Along with improved tax structure, compliance and reporting, it would also improve efficiency in logistics and distribution operations. The Cabinet, in order to ensure effectiveness of GST, has also approved a INR 2,256 crore makeover of the IT backbone for indirect taxes, in anticipation of the Goods and Services Tax regime.
Apart from all these, the government’s further opening up of the insurance sector to permit up to 49% FDI is a welcome step. The first IPO under this dispensation is that of ‘ICICI Prudential Life Insurance Company Limited,’ which made a début on the stock exchange recently. ‘The Insolvency and Bankruptcy Code, 2016,’ seeking to consolidate the existing framework by creating a single law had received the President’s assent in May this year itself, and certain provisions of the Act have already come into force from 5th August and 19th August 2016. Another step in the right direction.
To make India a more attractive foreign investment destination, the Ministry of Finance has proposed a new residency permit policy to allow key executives of foreign companies making investments worth US$ 2 billion or more in India to avail various facilities, such as special package on upscale housing, residency permits allowing long stay in the country, and cheap rates for utilities. The RBI is looking at measures to ease doing business and contribute to the growth of start-ups by simplifying processes and creating an enabling framework to receive foreign venture capital, in line with the Government of India’s ‘Start-up India’ initiative.
To conclude, India’s long journey of reforms represent a major structural overhaul of its financial system. It is important to note that the direction of change has been steady, and in retrospect a great deal has been accomplished in the past twenty five years. Various indicators such as India’s growth rate averaging at 6.8% over the period of 1991-92 to 2015-16, BSE market capitalization at over INR 1,12,04,018 crores, total Private Equity (PE) investments during January-July 2016 valued at US$ 9.8 billion, FII investments at US$ 2.68 billion in March 2016 and India notching up a 16-place jump to the 39th position on the World Economic Forum’s ‘Global Competitive Index’ of 138 nations are all testimonials to the reformations taking place in the Indian economy. If this India success story is to continue on the global arena, it will be essential to take these reforms along the logical directions already indicated, and accelerate the pace of change as much as possible. However, it is also important to recognise that the impact of financial sector reforms in accelerating growth will be maximised if and only if combined with progress in economic reforms in other realms.