Capital Market in Indian Economy

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Capital market is defined as the market for long term funds. It includes all facilities and institutional arrangements available for borrowing and lending of long term funds. It is concerned with the raising of funds for investments. The demand for long-term funds comes mainly from the private companies, agriculture and government. They need money for monetary over heads and basic industries. Supply of funds mainly comes from individual savings and insurance companies.

Components of Capital Market

The Components of Indian Capital Market are Gilt- Edged Market, Securities Market, Financial Institution, Financial Intermediaries.

1. Gilt - Edged Market:

This is the market of government securities or the securities guaranteed by the Govt. The word 'gilt- edged' is called as 'of the best quality'.

2. Securities Market:

Securities market is the market for shares and debentures of companies. It is further classified as new issue market and old issue market.

The New Issue Market (NIM): It is also called primary market. It is the market for raising of new capital in the form of equity shares, preference shares or debentures. Guaranteeing purchase of a new issue at a fixed price (underwriting) has been done by ICICI, LIC, IDBI etc.

Old Issue Market: This is the secondary market of securities. It deals securities already issued by companies. It aims at easy convertibility of securities into cash. It has two segments :

  • Stock Exchange
  • Over the Counter Exchange.

Foreign Trade in Indian Economy

  • Foreign trade in India is administered by the Ministry of Commerce and Industry
  • Foreign Trade offers foreign exchange, which helps us to eradicate poverty and also can be used for other productive purposes.
  • The foreign exchange reserves of India include Foreign Exchange Assets of RBI, Gold Stock of RBI, SDR (Special Drawing Right) holdings of the Government.
  • EXIM Policy also known as Foreign Trade Policy. It refers to the policy measures adopted by a country with reference to its exports and imports. The current policy covers period 2015-2020.
  • The Government of the country advises the EXIM Policy for a period of five years. The Export Import Policy is updated every year on 31st March. It becomes effective from 1st April of every year.
  • The objective of Foreign Trade Policy 2015-20 is to double India's exports of goods and services by 2020. Foreign Trade Policy 2015-2020 has been considered by including the long and medium term policy to enhance the whole development of India's foreign trade by enhancing trade competitiveness.
  • United States of America (USA) is India's biggest export market.
  • India's top import source: China.
  • India's biggest import: Crude Petroleum.
  • The largest Indian partners with their total trade (sum of imports and exports): UAE. It is followed by China and USA.
  • As a single economy, the EU (European Union) is the second largest trading partner of India.
  • Indian Fiscal system includes the management of revenue sources and expenditure of the central and state governments, public debt, deficit financing, budget, tax structures etc.
  • Deficit financing is a fiscal tool in the hands of the government to bridge the gap between revenue receipt and revenue expenditure.

FERA & FEMA

FERA (the Foreign Exchange Regulation Act) is a legislation passed by Indian Parliament in 1973 and came into effect as of January 1, 1974. FERA imposed strict regulations on transactions involving foreign exchange and controlled the import and export of currency.

FERA was repealed by the government in 1999 and replaced by FEMA (Foreign Exchange Management Act) which liberalized foreign exchange controls and removed many restrictions on foreign investment. FEMA came into effect on 1st June 2000.