مشخصه هند سیاست اقتصادی جدید:مقررات زدایی و آزاد سازی بخش مالی

A fundamental job of the financial sector of any economy is to allocate capital efficiently. To achieve this, capital is supposed to be invested in the sectors that are expected to have high returns and be withdrawn from sectors with poor prospects. The purpose of this paper is to ascertain the validity of this proposition in the context of financial liberalization in India. We first examine whether the total funds (debt and equity) available for investment started flowing to the “more efficient” (defined later), Indian firms due to financial liberalization. We examine changes in the allocation of credit across industrial sectors and changes in the allocation of capital among firms within the same sector or industry. Our empirical analysis shows that during the early years of financial liberalization the share of investment going to the more efficient firms did not rise, resulting in no perceptible rise in the overall efficiency of investment allocation for the economy. Our analysis of the sources and uses of funds shows that in the period immediately following the announcement of liberalization in 1991, there was a tendency in the Indian corporate sector towards a myopic use of funds. The surge in the availability of funds in the stock market, coming mainly from small and medium savers, failed to translate itself into any noticeable rise in gross fixed assets (GFAs). Thus, the lack of an improvement in the index of efficiency of investment allocation can be partly ascribed to bad investments to begin with. The message that emerges is that financial reforms in an inadequate regulatory framework do not necessarily have positive effects

A fundamental job of the financial sector of any economy is to allocate capital efficiently. To achieve this, capital is supposed to be invested in the sectors that are expected to have high returns and be withdrawn from sectors with poor prospects. It has been argued that formal financial markets and associated institutions improve the capital allocation process and thus contribute to economic growth. However, there is little actual evidence on whether and how financial markets improve the allocation of capital. Recently, Wurgler (2000), using a data set comprising 65 countries and 28 industries over 33 years finds that developed financial markets, as measured by the size of the domestic stock and credit markets relative to GDP, are associated with a better allocation of capital. Financially developed countries increase investment more in their growing industries and decrease investment more in their declining industries. Thus, although financially developed countries might not invest at a higher level Carlin and Mayer 1998 and Beck et al 2000, they do seem to allocate their investment better. For example, the elasticity of industry investment to value added is several times higher in Germany, Japan, the United Kingdom, and the United States than in financially undeveloped countries such as Bangladesh, India, Panama, and Turkey. Relative to countries with large financial markets, other countries both overinvest in their declining industries and underinvest in their growing industries. Wurgler argues that capital allocation is improved through at least three mechanisms. First, countries with stock markets that impound more firm-specific information into individual stock prices exhibit a better allocation of capital. This is consistent with the suggestion that larger markets have more informative prices, which help investors and managers distinguish between good and bad investments. Second, capital allocation improves as state ownership declines. This is not surprising because in state-owned firms, resource allocation is guided less by value-maximization than by political motives. Also, soft budget constraints and poor monitoring give managers in state-owned firms few incentives for efficiency. The existing evidence on this supports the view of Shleifer (1998) that “elimination of politically motivated resource allocation has unquestionably been the principal benefit of privatization around the world.” Third, strong minority investor rights, as measured by La Porta et al. (1998), are associated with better capital allocation. The allocational benefit of investor rights seems to come through limiting overinvestment in declining industries rather than through improving the supply of finance to growing industries. There are other notable contributors to the literature on the relationship between finance and economic growth. At the country level, King and Levine (1993), Levine (1998), Levine and Zervos (1998), and Beck et al. (2000) make an empirical case that financial development causes growth. At the industry level, Rajan and Zingales (1998) show that the industries that rely on external financing in the United States grow faster in financially developed countries. Arguably, these are industries with a technological need for external finance, perhaps to reach an efficient scale. At the United States state level, Jayaratne and Strahan (1996) find that economic growth increases in states that relax intrastate bank branching restrictions. At the firm level, Demirguc–Kunt and Maksimovic (1998) use a financial planning model to estimate sustainable growth rates in the absence of external finance and find that firms in financially developed countries are able to grow faster than this benchmark. One of the central questions asked by researchers on this topic is whether better capital allocation is a reason why financial development is associated with economic growth. Several authors have suggested this, including Goldsmith (1969), McKinnon (1973), Shaw (1973), and Greenwood and Jovanovic (1990). Some empirical evidence supports this suggestion. Bagehot (1873) cites better capital allocation as a primary reason for England’s comparatively fast growth in the mid to late 19th century. Jayaratne and Strahan provide evidence that their United States state-level results reflect improvements in the quality of banks’ loan portfolios, i.e., improvements in the allocation of their capital. Also, in their cross-country study, Beck et al. (2000) infer that the link between finance and growth is improved allocational efficiency, as suggested by the fact that financial development (specifically, the banking sector) is robustly associated not with higher capital accumulation but rather with higher productivity growth, which is how an improvement in capital allocation is expressed in their growth accounting framework. A hallmark of the new economic policy of India has been the gradual liberalization of its financial sector. The immediate effect of reforms in this sector has been a perceptible rise in the level of activity in the various financial markets. In this paper we ask questions that are similar to those described above to get at least a preliminary impression of the possible effects of the policy changes implemented so far. Although the first stock exchange in India is now well over a century old, until the 1990s, the volume of activity in Indian stock markets was insignificant compared to even some of the more recently opened stock exchanges of the developed countries, in particular, those of East Asia. One of the reasons for the low volume of activity was the degree of control exercised by the central authority over a firm’s choice of both the sources as well as the uses of funds. For example, the Controller of Capital Issues (CCI) imposed strict conditions on firms trying to raise funds through the equity route. Also, long-term borrowing was largely under the purview of the public-sector Development Financial Institutions (DFI) which, either through direct lending or through refinancing arrangements, virtually monopolized the supply of debt finance to the corporate sector. In May 1992, the CCI was abolished, making access to the equity market much less restrictive, subject only to meeting certain technical conditions, and not to any formal approval process as had been the case earlier. On the debt front, institutional reform was less significant, in the sense that the DFI monolith remained virtually intact. However, there were some reforms in interest rate policy, with the institutions increasingly being given the freedom to determine their structure of interest rates. The government reduced pre-empting of bank resources through a gradual reduction in reserve requirement ratios. The cash reserve ratio on incremental deposits was also reduced to 15% by 1994, and the statutory liquidity ratio was brought down to 31.5%. These measures led to a significant increase in funds at the disposal of Banks for lending. The interest-rate controls were relaxed as well. Finally, in order to encourage competition, new private-sector banks were given licenses and branch-licensing restrictions were relaxed. The Government reduced its stake in many financial institutions. The broad objective of financial reforms in India, of which the ones cited above are specific measures that are directly relevant to our analysis to follow, is to ensure that a market-oriented financial sector contributes positively to economic growth of the country by providing access to external (equity) funding for firms that have a technological need for it, and, by channeling investment towards growing and profitable industries and firms. We first examine whether the total funds (debt and equity) available for investment started flowing to the more profitable (defined later) industries, and, to the better firms within an industry, during the process of liberalization (1991–1998). We examine changes in the allocation of credit across industrial sectors and changes in the allocation of capital among firms within the same sector or industry by using a simple measure of efficiency, developed by Schiantarelli et al. (1994). Barring a few exceptions, such as the electronics, chemicals, and automobile industries, there is no perceptible increase in allocation efficiency as yet. We next examined whether external financing gained in importance in the 3 years immediately following the abolition of the CCI and found that equity, as a source of fund, had risen dramatically, as it should be the case, in the period immediately after the abolition of CCI. However, investment in gross fixed assets (GFAs) did not match it at all, except for Matured Firms, which are more than 50 years old. Instead, the correlation between increments in Internal Sources of Funds and investment in GFAs increased after liberalization. The findings are disturbing, as they fail to generate to the private investors any clear and positive signals about sound corporate management. We stop short of ascribing the lack of allocational efficiency of investment that we found in the first part of this report to possibly badly managed “use” of funds in the years immediately after liberalization, because there were many other changes both at the domestic as well as the international levels in the 1990s, which are outside the scope of this analysis. However, we do reiterate that because financial reforms in a weak regulatory framework can be fruitless, effort should be made to strengthen the existing framework. There is one possible caveat in our empirical finding, namely, it may be argued that investment decisions bear results with a lag. Therefore, a comparison of 3 years before, and 6 years after liberalization may not reveal its full effect on investment measures. However, we cite and discuss the results of similar exercises performed by others on the corporate sectors of Indonesia and Ecuador and note that they do show improvements within even shorter time frames.

Financial reforms leading to a well-functioning, market-based financial sector are supposed to enhance economic growth mainly by directing investment towards growing industries and better firms. We found that the efficiency of investment allocation in India failed to satisfy this criterion during the 6 years after liberalization of stock markets in 1992. The results are robust across industries and firms, with very few exceptions. This stands in contrast to the experience in Indonesia, where Schiantarelli et al. (1994) find strong evidence of an improvement in the efficiency index between 1981 to 1984 (pre-liberalization) and 1985 to 1988 (post-liberalization). They find similar positive results for Ecuador as well, where the major financial liberalization was in 1986. Therefore, the possible caveat that the efficiency index for India fails to show an improvement due to gestation lags, may not necessarily apply. One possible explanation for the lack of any spectacular improvement in allocation efficiency, which we examined in some detail, is the change in the source and use of funds by Indian firms after liberalization. Although EQCAP increased sharply as a source of fund, there was no corresponding rise in investment in productive assets in our sample. Thus, the deterioration in the efficiency index may have been caused by the choice of the wrong types of investments to begin with, which did not lead to higher profits or value added for the firms. On the positive side, the efficiency index shows improvement for the electronics, chemicals, food and automobile industries. It also shows an improvement for the Mature group, when firms are classified according to age.Guha–Khasnobis and Bhaduri 1999, Harris et al 1994, Jaramillo et al 1992, Kunt and Maskimovic 1995 and La Porta et al 1997