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Law, Finance, and Politics: The Case of India

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  • John Armour
  • Priya Lele
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    Abstract

    The process of liberalisation of India's economy since 1991 has brought with it considerable development both of its financial markets and the legal institutions which support these. An influential body of recent economic work asserts that a country's 'legal origin'-as a civilian or common law jurisdiction-plays an important part in determining the development of its investor protection regulations, and consequently its financial development. An alternative theory claims that the determinants of investor protection are political, rather than legal. We use the case of India to test these theories. We find little support for the idea that India's legal heritage as a common law country has been influential in speeding the path of regulatory reforms and financial development. There is a complementarity between (i) India's relative success in services and software, (ii) the relative strength of its financial markets for outside equity, as opposed to outside debt, and (iii) the relative success of stock market regulation, as opposed to reforms of creditor rights. We conclude that political explanations have more traction in explaining the case of India than do theories based on 'legal origins'.

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    Bibliographic Info

    Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp361.

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    Date of creation: Mar 2008
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    Handle: RePEc:cbr:cbrwps:wp361

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    Web page: http://www.cbr.cam.ac.uk/

    Related research

    Keywords: India; Law and Finance; Investor Protection; Economic structure and financial structure;

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    Cited by:
    1. Deakin, Simon & Demetriades, Panicos & James, Gregory A., 2010. "Creditor protection and banking system development in India," Economics Letters, Elsevier, vol. 108(1), pages 19-21, July.

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