A Fresh Approach towards Internalization: A Need of an Hour In India In Finance, cross-border transactions can be achieved at near-zero transactions costs using modern technology. In comparison, trade in goods has a more limited potential given the larger transportation costs. In Finance, there is a natural pressure for households to diversify their holdings internationally so as to achieve a free lunch of reduced risk. There is no comparable pressure in trade in goods which naturally encourages cross-border transactions. For these two reasons, internationalisation has a bigger impact upon Finance when compared with its impact upon the real economy.
Ironically, the Indian real economy has thus far seen a greater internationalisation when compared with what has been experienced in Finance. A fresh approach towards internationalisation must now be an integral part of Financial policy.
This fresh approach must focus upon the interests of the users of Financial services. The policy environment should support the ability for the house-holds of India and the non-Financial firms of India to obtain the highest quality and lowest cost Financial services. This would reduce the extent to which the difficulties of Indian finance hamper the economy. This is analogous to the basic framework of trade reform, where the removal of trade barriers supports buyers in the economy (whether households or firms) and imposes heightened competition upon producers.
The removal of barriers against foreign providers would yield immediate gains for households and non-Financial firms, who would obtain improved quality and reduced prices. Domestic financial firms would then face higher competition, and a second round of benefits would be obtained through the transformation of financial firms which would then be triggered off. This perspective is particularly relevant given the new rise of Indian multinationals, and the extent to which Indian firms compete with imported goods.
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