Development of the financial system is seen as a necessary condition for ________.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → economic growth
Option (1) economic growth — Correct. A well functioning capital market makes economic development easier. So the development of the financial system is seen as a necessary condition for economic growth.
Option (2) capital formation — Incorrect. Capital formation means adding to the stock of capital through savings and investment. Financial markets help it by passing savings into investment, but it is only a means; the wider goal for which a developed financial system is a necessary condition is economic growth.
Option (3) investor protection — Incorrect. Investor protection is one of the aims for which SEBI was set up. It is a job of the regulator.
Option (4) price discovery — Incorrect. Price discovery is a function of financial markets: the demand for and supply of funds help fix the price of a financial asset.
NCERT (Pre-rationalised Edition): “Capital Market … An ideal capital market is one where finance is available at reasonable cost. The process of economic development is facilitated by the existence of a well functioning capital market. In fact, development of the financial system is seen as a necessary condition for economic growth. It is essential that financial institutions are sufficiently developed and that market operations are free, fair, competitive and transparent. The capital market should also be efficient in respect of the information that it delivers, minimise transaction costs and allocate capital most productively.” |