Economic Liberalization and Financial Reforms in India

Financial Sector Reforms

The financial sector includes financial institutions such as commercial banks, investment banks, stock exchange operations, and the foreign exchange market.

The financial sector in India is controlled by the Reserve Bank of India (RBI). One of the major aims of financial sector reforms is to reduce the role of the RBI from a regulator to a facilitator of the financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI.

The reform policies led to the establishment of private sector banks, both Indian and foreign. Those banks which fulfill certain conditions have been given the freedom to set up new branches without the approval of the RBI and to rationalize their existing branch networks. Foreign Institutional Investors (FII), such as merchant bankers, mutual funds, and pension funds, are now allowed to invest in Indian financial markets.

Tax Reforms and Fiscal Policy

Tax reforms are concerned with the reforms in the government's taxation and public expenditure policies, which are collectively known as its fiscal policy. Direct taxes consist of taxes on the incomes of individuals as well as the profits of business enterprises.

It is now widely accepted that moderate rates of income tax encourage savings and the voluntary disclosure of income. The rate of corporation tax, which was very high earlier, has been reduced. Efforts have also been made to reform indirect taxes.

Foreign Exchange Reforms

In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. Markets now determine exchange rates based on the demand and supply of foreign exchange.

Trade and Investment Policy Reforms

The trade policy reforms aimed at the following:

• Dismantling of quantitative restrictions on imports and exports
• Reductions of tariff rates
• Removal of licensing procedures for imports

Import licensing was abolished except in the case of hazardous and environmentally sensitive industries. Export duties have been removed to increase the competitive position of Indian goods in the international markets.