• Indian financial system is a system in which people, financial institutions, banks, industrial companies and the government demand for fund and the same is supplied to them. 
  • There are two parts of Indian financial system, the demand side and the supply side.

Content is MISSING

  • Individuals who invest directly on their own in securities are also supplier of funds to the capital market. The trend in the capital market is basically affected by two important factors: 
    (i) Operations of the institutional investors in market and 
    (ii) the excellent results flowing in from the corporate sector. 
  • If shares or debentures of private corporations, primary sureties or government companies, or new securities and issue of bonds of public sector are sold or purchased in the capital market, then the market is called Primary 
  • Secondary market includes transactions in the stock exchange and guild aged market. 
  • The sources of capital in the Indian capital market are—share capital, acceptance letter, etc. 
  • Merchant bank, mutual fund, leaving companies, risk capital companies, etc. collect and invest public money into the capital market. 
  • Reliance Mutual Fund is the biggest mutual fund institution of India. 
  • Devaluation means lowering the official value of the local money in terms of foreign currency or gold. 
  • Balance of Payments (BOP) is the systematic record of all the economic transactions between one country and the rest of the world in a given period.
  • Balance of Trade (BOT) is the difference between the value of goods exported and the value of goods imported per annum. Services are not included in BOT. 
  • BOT is divided into current account and capital account. 

Finance Commission 

  • Finance Commission is constituted by the President under Art. 280 of the constitution. Since independence eleven finance commissions have sub-mitted their reports. 
  • The functions of the commission are to make recommendations to the President in respect of: 
    (i) The distribution of net proceeds of taxes to be shared between the union and the states, and the allocation of share of such proceeds among the states. 
    (ii) The principles that should govern the payment of grants-in-aid by the centre to the states. 
    (iii) Any other matter concerning financial relations between the centre and the states. 

Highlights at a Glance

Thirteenth finance Commission 2010-2015

About Devolution

  • States to get 32 per cent of central taxes, compared to 30.5 per cent now.
  • Up to 2.5 per cent of divisible pool may be transferred as grants to local bodies. 
  • Total transfers to states on the revenue account be capped at 39.5 per cent of the Centre's gross tax revenue, compared to 37.5 per cent.

About Fiscal Correction

  • Centre should target a revenue surplus by 2014-15.
  • Combined debt of Centre and states should be capped at 68 per cent of GDP by March 2015; currently at 82 per cent.
  • In the case of macroeconomic shocks, Centre to borrow and devolve to states instead of relaxing the state borrowing limits.
  • The medium term fiscal plan should be made a statement of commitment.

About the Goods and Services Tax

  • Single rate for goods and services are proposed. 
  • Tomake GST purely consumption based, taxes and cesses should be subsumed.
  • Petrol, diesel, alcohol, tobacco may be charged to GST with additional levies by the Centre and states.
  • Only public services, unprocessed food items, health, education and transactions between employer and employee be exempted.

Fourteenth finance Commission (2015-2020)

Major Recommendations of 14th Finance Commission headed by Prof. Y.V. Reddy

  • The Fourteenth Finance Commission has radically enhanced the share of states in the Central divisible pool from the current 32% to 42% which in the biggest ever increase in vertical tax devolution.
  • The Fourteenth Finance Commission has also approved a new horizontal formula for the distribution of State's share in divisible pool among the States.
  • Several other types of transfers have been proposed including grants to rural and urban local bodies, a performance grant, along with grants for disaster relief and revenue deficit.
  • The Fourteenth Finance Commission has not made any recommendations concerning sector specific grants unlike the thirteenth finance commission.
  • The share of states in the net proceeds of the shareable Central taxes should be 42%.This is 10% higher than the recommendation of 13th Finance Commission.
  • Revenue deficit to be progressively reduced and eliminated.
  • A target of 62% of GDP for the combined debt of centre and states.
  • The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent.
  • FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation.
  • Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act CGST).
  • Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula based plan grants.
  • States need to address the problem of losses in the power sector in time bound manner.

Stock Exchange 

The stock exchange is the market for buying and selling of stocks, shares, securities, bonds and debentures, etc. It increases the market ability of existing securities by providing simple method for public and others to buy, and self securities. 


  • The Stock Exchange Board in India (SERI), set up on 12 April 1988 was accorded statutory status in March 1992, following recommendations of the Narasimhan Committee.

Fiscal System

It refers to the management of revenue and capital expenditure finances by the state. Hence fiscal system includes budgetary activities of the government that is revenue raising, borrowing, and specified objectives.

Fiscal Policy

Fiscal policy refers to the use of taxation, public expenditure, and the management of public debt in order to achieve certain specified objectives.

Indian Fiscal System includes or refers to the management of public debt. deficit financing budget, tax structure, etc.