INDIAS PATTERN OF FINANCIAL LIBERALIZATION AND GLOBALIZATION

- Inflow liberalized before outflows

- Nonresident capital flows precedence before residents
- Opening for corporates, banks etc. before opening for debt

Reasons for opening equity before debt

- Well-developed equity market

- 1991 bop crisis reinforced urgency to reduce forex debt
- Tarapore committee I and II recommended dismantling key capital account transactions to lead
to fiscal consolidation
- Indias large fiscal deficit also ruled out opening for debt

Comparison with other countries

- Chin-ito index, measure of degree of financial openness, put India at -1.13, which is the lowest.
Even Brazil, Indonesia and Thailand are ahead of it.
- Prasad (2009) also finds that India lies at the lower end of the distribution.

EXPERIENCE OF INDIA WITH FINANCIAL GLOBALIZATION

- Rising financial integration over time in gross terms

- Foreign capital levels rise steadily after 2001
- Surge till 2008, and after that a sharp reversal
- Return in rise in 2010, but a fall again after that
- Gross capital flows doubled between 2005 and 2007
- The net capital account more than doubled
- Stable and long term fdi’s lagged behind at 30 percent of net capital flows
- - investment rates rose from 24 percent of gdp to 38 percent of gdp from 2000 to 2010
- Corporate financing patterns to absorb external funding, which is ow almost 1/3 of the total
financing
- FDI risen 7 fold, and in line with china
- Outward direct investment by Indians risen 5 times

Little evidence of disciplinary effect of financial globalization in india

- Inflation decreased to 4% until mid 2000’s but rebounded later

- Fiscal bALances shrank to 6.3% of gdp but increased to unsustainalble levels after 2008 crisis
- Current account gap widened unsustainably

Volatility increased due to financial openness

- Consumption volatility increased

- Gdp volatility, measured by coefficient of variation rose from 0.12 to 0.31 from 1997-2002 to
2003-2011
- Private consumption 3 times as volatile from 0.11 to 0.30
- Inflation volatility between 0.38- 0.34
 - Real exchange rate variability increased significantly, nominal exchange double from 2002- 211

Stock Market

- Grew in size, market capitalization rose 3 fold between 1991 and 2000 and 7 times from 2000 to
2011, with a wider base i.e. more no. of companies
- Acquired depth and liquidity comparing faborably with foreign markets
- Bond market, not open as much to foreign investors also performed considerably well
- Stock market open to shocks from foreign countries