Structure of the Economy
The Economy has undergone vast changes since planned development was initiated in 1951. Early in the fifties total domestic savings as a percentage of GDP was hardly 5% and rate of growth of GDP was around 3%.
The structure of *****n Economy in 1951-52 showed that the shares of the primary sector, secondary sector and tertiary sector were 56%, 17%, and 27% respectively. The primary sector consists of Agriculture, Forestry, Fishing, Mining and Quarrying. The secondary sector comprises Manufacturing, Construction, Elec¬tricity etc. The tertiary sector encompasses the rest of the economy, viz., Transport, Communication, Trade, Finance, Real Estate, and Other Services. By the end of the Seventh Plan (1990-91), after four decades of planning, agriculture accounted for 35% and manufacture and construction sector for 26% and the tertiary sector accounted for the rest (39%). By 1998, the importance of the services sector has gone up further to around 49%.
It would thus be seen that the importance of agriculture has gone down from 56% to 27% while the significance of manufacturing and services has gone up significantly over the planned period mainly due to shifts of resources from the primary sector to other sectors of the economy and in particular the services sector. The saving rate continued to be 22 to 24% of the GDP during the eighties and nineties while the same in fifties was only 10%. In 1997-98, savings rate is estimated at 26.5% and Investment rate at 27.8%.
from 15 days to 3 years. The interest rates will vary from bank to bank but the ceiling rates are fixed by the RBI upto one year deposits at present. These deposits are also insured with the Deposit Insurance and Credit Guarantee Corporation. Besides the operation of the banks, being regulated and inspected by RBI, the deposits kept with them are supposed to be safer and risk free. Although the returns are lower, the risk is also lower and risk averse investors will prefer investrncnts in these avenues.
Next to keeping in cash most savings generally flow into some form of the bank deposits. The average Households in ***** keep about 10-15% of their savings in financial form in cash and nearly 36-42% in bank deposits of various forms. But these avenues of investment give a return which is zero in the case of cash or a return less than or equal to the inflation rate a about 10 to 12 per cent per annum from the financial system and promote production of goods and services in the real sector, leading to a rise in output and incomes of the people.
The role of the financial system is thus to promote savings and investment in the economy and to enlarge these resources flowing into the financial assets, which are more productive than the physical assets. Even among financial assets, some are more productive than others and a proper financial intermediation and sophistication in financial services would promote larger production of goods and services in the economy. The financial system thus has an important role to play in the productive process and in the mobilisation of savings and their distribution among the various productive activi¬ties. The stock and capital markets have thus a significant role to play in this context because they are part of the financial system.
They promote inter alia a larger mobilisation of savings by facilitating investment in financial assets such as shares, debentures, securities, etc., and a greater degree of liquidity is imparted to the existing investments by facilitating the purchase and sale of existing securities through the secondary market (viz., stock market). They also provide encourage¬ment to the listing of the shares of companies which facilitates their trading and the valuation of their assets by virtue of a quotation on the stock exchange, and help them to raise further resources, if need be.
These institutions promote the expansion of the new issues and in the raising of larger resources in the capital market through widening the base of trading, increase in the number of instruments for savings and investment and through widening the base of trading, increase in the number of instruments for savings and investment and through widening the network of saving moblisation efforts. The recent increase in the financial institutions such as leasing and hire purchase and Housing Finance companies, merchant banks and mutual funds also helped to increase the degree of specialisation in the financial structure. New instruments of trading such as participation certificates, certificates of deposits, commercial paper are being experimented in the money and capital markets which have widened the scope of financial services and sophistication in *****.