INDIA: MORE MARKET, LESS GOVERNMENT

Today's India is one of the most rapidly growing economies in the world, right after China. FDI rules for investors are becoming more and more liberal while real estate investment is booming as well. A stronger financial system would ensure India faster economic growth and higher revenues without high tax rates. Tight government control over almost every part of the financial system is undermining Indian economic growth. To sustain rapid growth of GDP and spread its benefits India needs a financial system that is comprehensively market-oriented. The shortcomings of Indian financial system fall largely on three major areas:



1. Formal institutions attract only half of Indian household savings.

2. These institutions allocate more than half of the capital they do attract to economy's least productive sectors such as state-owned enterprises, agriculture and unorganized sectors. The most productive corporations in India receive only 43 percent of all commercial credit.

3. Since the financial system is weak in both aspects - mobilizing savings and allocating capital - borrowers in India pay more and depositors receive less than in comparable economies.

This huge failures place heavy burden on India's economy; just fixing them would give it an immense boost. Research by McKinsey Global Institute predicted that a coherent program of reforms for the financial system and its institutional framework would add 47 billion to India's GDP growth. This would increase current economic growth from 7 percent to 9,4 percent. This would place India upon current Chinese economic boom. The resulted growth of GDP would be slightly below shy be 30 percent above current projections by 2014. This would lift unexpected number of people out of poverty. Financial reforms are one of the key transformation areas in the process of Indian convergence. Without dynamic and purely market-driven financial institutions India will hardly rely on competitive and innovative entrepreneurship since investors and entrepreneurs would not be able to find proper financial support to their projects. Governmental control and regulation over financial system remains unusually high. Many forecasted reforms suddenly ran out of steam. Change and progress will require strong rethinking of goverment's role in financial markets.

However, without serious reforms of the financial system India will never be able to complete the transition from a poor economy, dominated by agriculture, to a prosperous economic oasis dominated by services and manufacturing. Financial reforms offer a lot of opportunities. In a larger sense, financial reforms are greatly-fueled challenge to put contemporary academic research results and professional recommendations soundly into practice.