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Law, Finance, and Politics: The Case of India

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  • John Armour
  • Priya Lele

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'.

Suggested Citation

  • John Armour & Priya Lele, 2008. "Law, Finance, and Politics: The Case of India," Working Papers wp361, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp361
    Note: PRO-2
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    File URL: https://www.jbs.cam.ac.uk/cbrwp361/
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    References listed on IDEAS

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    1. Bagchi,Amiya Kumar, 1982. "The Political Economy of Underdevelopment," Cambridge Books, Cambridge University Press, number 9780521284042.
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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.
    2. Reddy, Kotapati Srinivasa, 2015. "Revisiting and Reinforcing the Farmers Fox Theory: A Study (Test) of Three Cases in Cross-border Inbound Acquisitions," MPRA Paper 63561, University Library of Munich, Germany, revised 2015.
    3. Reddy, K. Srinivasa, 2015. "Institutional Laws, and Mergers and Acquisitions in India: A Review/Recommendation," MPRA Paper 63410, University Library of Munich, Germany, revised 2015.
    4. Jackson, Howell E. & Roe, Mark J., 2009. "Public and private enforcement of securities laws: Resource-based evidence," Journal of Financial Economics, Elsevier, vol. 93(2), pages 207-238, August.

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    More about this item

    Keywords

    India; Law and Finance; Investor Protection; Economic structure and financial structure;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P37 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Legal

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