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The following OECD assessment and recommendations summarise chapter 5 of the Economic survey of India survey of India published on 9 October 2007.
Does the financial sector require further reform?
The financial sector has one of the highest shares of public ownership in the economy and needs to be liberalised further. Successful reforms have already restored the health of the public banks, most of which now have minority private shareholders, and have created new regulators. The functions of the Reserve Bank of India (RBI) as the owner of some public banks and manager of government debt are being reduced but, consideration should be also given to whether the supervision of the banking sector should remain inside the RBI. Despite progressive deregulation, banks can still allocate only 41% of their assets completely freely, notwithstanding long-standing recommendations by government committees that this ratio should be increased. Private-sector services (and new banks in particular) have been successful in India and so progressive privatisation of the public banks would most likely improve the efficiency of the sector, especially if they were given greater freedom to allocate assets and restrictions on foreign direct investment in the sector were removed. As capital would be better allocated, the efficiency of the whole economy would be improved. Equity markets have been transformed as the result of private-sector initiative and new regulatory agencies, and have become competitive with leading world markets. However, a much broader range of exchange-traded derivative instruments needs to be allowed in order to improve the market for bonds. In this regard, opening markets to all participants would help. A more principle-based approach to capital market regulation might help speed up the introduction of new instruments and, as in product markets, supervisory bodies should be subject to periodic regulatory impact reviews.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The complete edition of the Economic survey of India 2007 is available from:
For further information please contact the India Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat’s report was prepared in the Economics Department by Richard Herd, Paul Conway and Sean Dougherty, under the supervision of Willi Leibfritz. Research assistance was provided by Thomas Chalaux.