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Home > Business > PTI > Report

Govt stresses on reforms with stability

December 06, 2004 14:21 IST

Charting a five-point agenda for financial sector reforms, the government on Monday favoured further opening up of the external sector, including easier capital account convertibility, but stressed on financial stability of the country.

Addressing the Indian Economic Summit, economic affairs Secretary Rakesh Mohan said revenue collections must improve and public sector must contribute to the nation's savings so that more funds are available for infrastructure financing.

"There is a need to create an efficient financial sector, ensure better price discovery, efficient allocation of resources, foster competition and keep on opening the external sector carefully but with a very strong eye on the financial stability," he said at the summit organised by World Economic Forum and CII in New Delhi.

After the East Asian crisis of 1997, there was a wide debate on the speed of opening up the economy and degree of capital account convertibility, he said. "Low income countries like India have to particularly keep a watch on financial stability," he added.

While most emerging countries have suffered from financial instability during the period of opening up of their economy, Mohan said India was the only country, which never faced such instability.

India attained financial stability despite the rapid pace of financial sector reforms, he said, adding this pace of reforms has to be maintained. He said the public sector has to "turnaround" from being a dis-saver to a saver, which would push the country's savings rate.

India Economic Summit: Complete Coverage

Mohan said the country has to "work harder" for injecting competition to attain higher growth in the financial segment.

"We need many more private sector players. We need many more financial institutions. At present most of the financial institutions are foreign players," he said referring to the astronomical growth and reduction in call rates in the telecom sector after entry of private players.

Referring to the mutual fund segment, he said most of the funds were investing in debt markets and their participation was less in equities market. "There is a need for expansion of financial institutions in the equity market so that retail investors can reap the gains, he said.

As private insurance companies expand and pension funds come in, he said "we will have multiplicity of financial institutions and long term funds required for infrastructure."

Mohan also stressed on greater integration of financial market so that there is more efficient allocation of funds across the financial sector and uniformity in the pricing of various financial products.

While expressing satisfaction at the pace of development of government securities market, he said "we need to do the same for corporate debt market."

Mohan, a former RBI deputy governor, also asked banks to shift to "risk-based and information-based lending" to reduce interest rates and transaction costs as they move on to international Basel-II norms by 2006.

Admitting that public sector was eroding the overall savings of the country by 0.2 per cent of GDP, he said there was a need to "turnaround" the sector so that it can improve the overall savings rate and enable productive resources to be released for infrastructure development.

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