6. Liberalise financial markets

India's financial sector remains small and underdeveloped. To meet its growth potential, India needs to pursue financial reforms to channel savings effectively into investment, meet funding requirements for infrastructure and enhance financial stability. To develop India's capital markets, we think reforms need to proceed on several fronts.

• Pension and Insurance reforms. Liberalise the restrictions on investments by pension and insurance funds, which lead to a vast majority of assets being invested in public-sector securities.
• Currency, interest rate and derivatives market. At present, these markets have weak institutional structures, poor liquidity, lack width or depth, participation is constrained through a number of eligibility and origin barriers, and arbitrageurs and risk-takers are discouraged, impeding price discovery.
• Bond market reforms. The corporate bond market remains small and underdeveloped.
• Banking sector reforms. This is a long-term and complex effort that will involve divesting government ownership of public-sector banks, allowing investor voting rights in proportion to ownership, encouraging consolidation, and fully opening up to foreign banks.

India has thus far been able to sustain growth rates, without major reforms in its financial sector. As the development of the equity market has shown, if India were to reform other aspects of its financial sector, it could prove a big engine for growth, with large employment opportunities and efficiency improvements which would benefit the entire economy.