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284 India—most certainly urban India—has changed beyond recognition in less than two decades. Undeniably much of that change is the result of the economic reforms put in place since 1991, which have fundamentally transformed the economy and, indeed, the very mind-set of India. The change is more visible in some industries than in others. These include aviation, telecommunication, more recently retail, and certainly finance. Hardly a single area of the financial sector has remained the way it used to be. Private banks, mutual funds, and insurance companies are the most visible new developments. And within finance, financial markets have arguably undergone the greatest transformation. It is difficult today to imagine an India without the Securities and Exchange Board of India (SEBI), without the National Stock Exchange (NSE), without derivatives, and without the trading of demat (dematerialized) shares through online brokers, all of them children of the reforms. The Indian Financial Sector and the Status of Reforms There is a fundamental difference in character between reforms in financial markets and reforms in other parts of the economy or even in other segments of the financial sector. Almost everywhere else the primary thrust of reforms has been in Financial Development in India: Status and Challenges rajesh chakrabarti 11 I would like to thank the participants of the Conference on Financial Sector Regulation and Reforms in Asian Emerging Markets for their comments. I especially thank Eswar Prasad for very helpful suggestions . I alone am responsible for all remaining errors and shortcomings. 12689-12_CH11-rev.qxd 10/5/11 12:33 PM Page 284 financial development in india 285 scaling the state sector down from its monopoly position by allowing entry by private players, both domestic and foreign. In that sense the reforms have been liberating—that is, have taken the handcuffs off the private sector. In the financial markets, by contrast, the main thrust of reforms has been in building institutions that lead to market growth. In that sense, financial market reforms have been enabling—that is, have provided public institutions (whether regulators or exchanges) with new ground rules of operation. The distinction between the two kinds of reform is critical. The former refers to giving hitherto forbidden agents access to a profit-making activity, while the latter is about providing public facilities that allow such activity to take place. (The public sector was not a direct player in the markets.) Of course, this is not to downplay the role of any of the liberating reforms, neither those that allow new players to set up exchanges, those that allow foreign institutional investors (FIIs) access to Indian securities, nor those that allow the growth of private mutual funds. But by and large reforms in financial markets have been about institution building, and hence their success— and future tasks—should be assessed primarily by the quality of the institutions they have created. And indeed institution building in the postliberalization financial sector in India bears the strong signature of direct government intervention. The SEBI, formally empowered in 1992, is perhaps the most pivotal of these institutions. But of almost comparable impact is the NSE, created only two years later at the behest of government-run financial institutions. The NSE was quick to introduce technology and improved procedures into securities trading, which was at that point a murky world of broker networks. In a little over a decade the NSE captured 70 percent of equity trading, virtually the entire derivatives markets (another major and overdue innovation), and much of the debt market, while the traditional exchanges either virtually closed down or struggled to match the NSE in its transparency and standards. It is fair to say that the creation of an efficient player had at least as much of a role in enhancing the efficiency in Indian financial markets as the creation of regulatory requirements. Elsewhere, competition has spurred change. As the banking sector opened up, cautiously and gradually, in the mid-1990s, a spate of new private banks came in. Interestingly, once again most of the more important ones emerged out of the existing public sector or the quasi-public sector. New standards were set by these new private banks in customer service, in technology adoption, and in retail banking . The remaining public sector banks were still in charge of three-quarters of the industry, but in trying to match their younger and more agile rivals, they ended up with higher efficiency, too. The mutual fund and insurance industries have also boomed largely...

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