Title: Financial Globalization and India's Equity Market Reforms
Abstract: Click to increase image sizeClick to decrease image size Notes The author wishes to express special appreciation to Ajay Shah and Susan Thomas for their gracious help and in some cases co-participation in fieldwork, as well as for their generous sharing of their ideas about India's equity markets. Ajay and Susan co-authored an earlier version of this paper. Rob Jenkins read two versions of this essay and offered many valuable substantive and editorial suggestions. Thanks also to Leslie Armijo, Sugata Bhattacharya, Vijay Joshi, Lloyd Rudolph, Herman Schwartz, the participants at the SAIS symposium, and members of the Network on South Asian Politics and Political Economy for their comments on an earlier version of this paper. 1 My premise is that the study of globalization's impact on economic policymaking in developing countries is at an exploratory stage. The advantages of a case study approach at the exploratory – as distinct from the confirmatory – stage of research are highlighted in John Gerring, “What is a Case Study and What is it Good for?” American Political Science Review Vol. 98, No. 2 (May 2004), pp. 341–54; and John Gerring, Social Science Methodology: A Criterial Framework (Cambridge: Cambridge University Press, 2001), especially Chapter 10. 2 For an analysis of domestic factors see John Echeverri-Gent, “Politics of Markets: Political Economy of Reforming India's Stock Markets,” unpublished manuscript, University of Virginia, 2004; Matthew Rudolph, “The Dragon and the Elephant Enter the Matrix: Asset-classes Financial Positions and the Politics of Securitization in China and India,” paper presented at the Annual Meeting of the American Political Science Association, Philadelphia, PA, August 28–31, 2003; and Sucheta Dalal, “Setting the Agenda for Change in Indian Capital Market: Five Years of National Stock Exchange,” Economic and Political Weekly, September 4, 1999. 3 For international norms as focal points see Geoffrey Garrett and Barry R. Weingast, “Ideas, Interests and Institutions: Constructing the European Community's Internal Market,” in Judith Goldstein and Robert Keohane, eds., Ideas and Foreign Policy: Beliefs, Institutions, and Political Change (Ithaca: Cornell University Press, 1993), pp. 173–206. 4 For an interesting discussion on how ideas can be deployed to actively frame policy debates for political advantage see John L. Campbell, “Institutional Analysis and the Role of Ideas in Political Economy,” in John L. Campbell and Ove K. Pedersen, eds., Neoliberalism and Institutional Analysis (Princeton: Princeton University Press, 2001), pp. 159–89. 5 Barbara Stallings, “International Influence on Economic Policy: Debt, Stabilization, and Structural Reform,” in Stephan Haggard and Robert R. Kaufman, eds., The Politics of Economic Adjustment (Princeton: Princeton University Press, 1992), pp. 41–88. Other classificatory schemes for analyzing the different dimensions of globalization can be found in Mauro F. Guillen, The Limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain (Princeton: Princeton University Press, 2001); and David Held, Anthony McGrew, David Goldblatt, and Jonathan Perraton, Global Transformations: Politics, Economic and Culture (Stanford: Stanford University Press, 1999). 6 For the importance of mechanisms in causal explanation see James S. Coleman, “Social Theory, Social Research, and a Theory of Action,” American Journal of Sociology Vol. 91 (1986), pp. 1309–35; Jon Elster, Nuts and Bolts for the Social Sciences (Cambridge: Cambridge University Press, 1989); Gary King, Robert O. Keohane, and Sidney Verba, Designing Social Inquiry (Princeton: Princeton University Press, 1994), pp. 85–87; and Peter Hedstrom and Richard Swedberg, eds., Social Mechanism: An Analytical Approach to Social Theory (Cambridge: Cambridge University Press, 1998). 7 Global Development Finance: Harnessing Cyclical Gains for Development Vol. 1, Analysis and Summary Tables (Washington, DC: World Bank, 2004), p. 4; and World Debt Tables 1990–91, Vol. 1 (Washington, DC: World Bank, 1990), p. 16. 8 Jeffry A. Frieden and Ronald Rogowski, “The Impact of the International Economy on National Policies: An Analytical Overview,” in Robert O. Keohane and Helen V. Milner, eds., Internationalization and Domestic Politics (Cambridge: Cambridge University Press, 1996), pp. 25–47. 9 Thomas D. Willett, “Toward a Broader Public-Choice Analysis of the International Monetary Fund,” in David M. Andres, C. Randall Henning, and Louis Pauly, eds., Governing the World's Money (Ithaca: Cornell University Pres, 2002), pp. 60–98; Anne Kruger, “Whither the World Bank and IMF,” Journal of Economic Literature Vol. 4 (1998), pp. 1983–2020; Tony Killick, Aid and the Political Economy of Policy Change (New York: Routledge, 1998); Graham Bird, “The International Monetary Fund and Developing Countries: A Review of the Evidence and Policy Options,” International Organization Vol. 50, No. 3 (1996), pp. 477–511; Roland Vaubel, “Bureaucracy at the IMF and the World Bank,” World Economy Vol. 19, No. 2 (1996), pp. 195–210; Miles Kahler, “External Influence, Conditionality, and the Politics of Adjustment,” in Haggard and Kaufman, The Politics of Economic Adjustment, pp. 89–139. 10 See IOSCO, “International Conduct of Business Principles,” at www.iosco.org/docs-public/1990-international_conduct-document02.html. 11 For discussion of the resolution see “IOSCO Conference: Final Communiqué,” Financial Regulation Report, October 1, 1998. 12 “India: London, US Bourses Vie for Indian Pie,” Business Line (Chennai), February 8, 2001. 13 The Financial Stability Forum web page is a good source for background on the organization. See www.fsforum.org. 14 For a recent discussion of these norms see “International Standards and Codes to Strengthen Financial Systems,” Financial Stability Forum (April 2001) at www.fsforum.org. 15 The observations and recommendations discussed in this paragraph come from “Report of the Follow-up Group on Incentives to Foster Implementation of Standards” presented to the Financial Stability Forum, September 7–8, 2000, available at www.fsforum.org 16 Overseas corporate bodies include overseas companies, partnerships, trusts, and other corporate bodies with at least 60% equity owned by non-resident Indians. At the end of 2001 there were 664 OCBs. Report of the Joint Committee on Stock Market Scam and Matters Relating Thereto, Volume I (New Delhi: Lok Sabha Secretariat, 2002), p. 165. 17 “India Fund” (1986); “India Growth Fund” (1989); “Magnum Fund” (1989); “Asian Convertible and Income Fund” (1990), “Himalayan Fund” (1990). 18 For data for 1980–82, see International Finance Corporation, Emerging Stock Markets Factbook, 1990 (Washington, DC: International Finance Corporation, 1990), pp. 6–7, 14–15. Data for 1989–91 is from Emerging Stock Markets Factbook, 1994, pp. 14–15, 18–19. 19 Vijay Joshi points out that the crisis led to a shift from debt-creating to non-debt-creating inflows. See “India and the Impossible Trinity,” The World Economy (April 2003), pp. 555–83. 20 Sources close to Manek were reported to have said that the opening to the FIIs meant “replacing a desi (domestic) cartel by a firangi (foreign) one.” See “The Last Gasp,” Business India, January 3, 1994, pp. 98–9. 21 Data for net portfolio equity inflows was calculated from Global Development Finance Vol II. Summary and Country Tables 2004 (Washington, DC: World Bank, 2004), pp. xxxviii–xl. The rankings per capita for 1990–2000 were calculated from International Monetary Fund, International Financial Statistics On-line (www.imfstatistics.org) accessed December 2003; and World Bank, World Development Indicators (CD Rom) (Washington, DC: World Bank, 2002). 22 The first mutual fund opened by Morgan Stanley became enmeshed in controversy. Author's interviews with Rajesh Gajra, special correspondent, Intelligent Investor, July 4, 1999, and with Jayant M. Thakur, chartered accountant, Mumbai, January 21, 1999. 23 Economic Survey, 1992–93 (New Delhi: Ministry of Finance, 1993), p. 67. 24 Jairus Banaji, “Investor Capitalism and the Reshaping of Business in India,” Queen Elizabeth House Working Paper Number 54, Oxford University (September 2000), pp. 4–5. 25 According to the managing director Tata Asset Management Ltd., “The FIIs have increased the transparency of our mutual funds. Because of the FIIs, we now have quarterly disclosure. They as investors insisted on this practice. The FIIs have improved our management skills. They have increased professionalism. They have also brought a technology upgrade and better investor services.” Author's interview with K. N. Atma Ramani, Mumbai, August 5, 1999. On the other hand, the chief executive of YSN Shares & Securities Pvt. Ltd. charges that FIIs sometimes use their leverage over management to secure preferential allotments that are detrimental to the interest of other investors and corporate governance. Author's interview with C. Kamdar, June 10, 1999. 26 Report of the Joint Committee on Stock Market Scam and Matters Relating Thereto, Volume I (New Delhi: Lok Sabha Secretariat, 2002), p. 179; and Sucheta Dalal, “Different Strokes: Why OCBs Get Away,” Indian Express, March 18, 2002. 27 Report of the Joint Committee on Stock Market Scam and Matters Relating Thereto, Volume I (New Delhi: Lok Sabha Secretariat, 2002), p. 177. 28 Debashis Basu and Sucheta Dalal, The Scam: Who Won, Who Lost, Who Got Away (Mumbai: Kensource, 2001), p. 320. 29 Sucheta Dalal, “Cheques and Balances: Ayodhya Holds the Key to Sensex,” Indian Express, March 3, 2002; P. Vaidyanathan Iyer and Subhomoy Bhattacharjee, “Market Manipulation: How FIIs Play the Game,” Business Standard, May 17, 2001. 30 Report of the Joint Committee on Stock Market Scam and Matters Relating Thereto, Volume I (New Delhi: Lok Sabha Secretariat, 2002), pp. 167–71; and Rakesh P. Sharma, “FII Sub-Accounts Dealt 51-94% of Total Transactions in KP stocks,” Business Standard, May 20, 2001. 31 Report of the Joint Committee on Stock Market Scam, pp.167–71; Basu and Dalal, The Scam, pp. 322–5. See also Rakesh P. Sharma and Janki Krishnan, “CSFB Executed Rs. 1814 crore trades for Ketan Parekh,” Business Standard, May 21, 2001; and Sucheta Dalal, “Cheques and Balances: How CSFB Funded Ketan and Kayan,” Indian Express, April 29, 2001. 32 World Bank, World Development Report 1989 (Oxford University Press, 1989). The data that 25 countries had conducted financial sector bailouts during the decade is cited on p. 1. Even those countries that did not suffer economic crises suffered a capital shortage that caused them to turn to their private sector and financial reform. In July 1989, the World Bank's Moeen Qureshi, then senior vice president for operations, observed that the “resource stringency” experienced by borrowing member countries has made it even more urgent for them to focus their attention on private sector development, and many countries have realized that greater priority must be given to financial sector reform. 33 Felipe Morris, “India's Financial System: An Overview of its Principal Structural Features,” World Bank Staff Working Paper Number 739 (Washington, DC: World Bank, 1985). 34 The recommendations were reported in “Reform of Financial System,” Economic and Political Weekly, May 4, 1991, pp. 1145–47. 35 See The Financial System Report by M. Narasimham, reprint ed. (New Delhi: Nabhi, 1998), especially pp. 78–9. 36 The similarities were noted immediately after the release of the report by Debashis Basu, “Radical Changes Proposed,” Times of India, November 13, 1991. Critical explanations for the similarities can be found in K. S. Krishnaswamy, “More a Lawyer's Brief than a Report,” Economic and Political Weekly, February 22, 1992, pp. 391–3; and JM, “For Bankers, By Bankers,” Economic and Political Weekly, January 4, 1992, pp. 16–17. 37 “World Bank Conditionalities,” The Indian Express, February 25, 1992. 38 Government of India, Parliamentary Debates, March 30, 1992, pp. 530–32, 540. 39 I thank Devesh Kapur for suggesting this strategy to me. For the role of counterfactuals in causal analysis see James D. Fearon, “Counterfactuals and Hypothesis Testing in Political Science,” World Politics Vol. 43 (January 1991), pp. 169–95; and Philip E. Tetlock and Aaron Belkin, eds., Counterfactual Thought Experiments in World Politics (Princeton: Princeton University Press, 1996). 40 Cited in Government of India, Report of the High Powered Committee on Stock Exchange Reforms(New Delhi: Ministry of Finance, Department of Economic Affairs, 1985), p. 25. An early SEBI official noted that the recommendations in favor of establishing an independent regulatory agency greatly facilitated the passage of legislation giving SEBI statutory authority. Author's interview with C. B. Bhave, Mumbai, July 4, 1999. 41 Report of the High Powered Committee on Stock Exchange Reforms, p. 26. Two members of the committee described the nature of the closely divided opinion among the committee members. Author's interviews with L. C. Gupta, New Delhi, July 21, 1999, and with M. R. Mayya, Mumbai, August 28, 1999. 42 “Eventful Year for Bombay Stock Exchange,” Times of India, December 25, 1986. 43 Lok Sabha Debates Vol. XXIV, No. 5, Saturday, February 28, 1987 (New Delhi: Lok Sabha Secretariat, 1987), p. 14. 44 Author's interview with S. A. Dave, Mumbai, June 13, 1999. 45 R. H. Patel, “Demutualisation of Stock Exchanges,” Economic and Political Weekly, March 23, 2002, Via www.epw.org.in. 46 The World Bank continued to push for debt market reform in the 1990s. Reform in this area has been much slower than equity market reform. What success the World Bank has had in promoting debt market reform has resulted less from the Bank's leverage than from a recognition of India's need to tap debt markets to raise developmental finance. See “World Bank Head Promotes Indian Insurance Sector Reform,” Asia Pulse, October 14, 1996; and P. Devarajan, “Secondary Debt Market: Is There an RBI Game Plan?” Business Line (Chennai), October 6, 1997. 47 Media interview with Manmohan Singh (c. 2002), www.pbs.org/wgbh/commandingheights/shared/pdf/int_manmohansingh.pdf. 48 Author's interview with Manmohan Singh, New Delhi, July 20, 1999. 49 Each of these figures came to work in key positions in the ministry of finance. See Deena Khatkhate, “Looking Back in Anger: A Former Insider's View of Economic Policy,” Economic and Political Weekly, December 27, 2003, via www.epw.org.in; Vanita Sashtri, “The Political Economy of Policy Formation in India: The Case of Industrial Policy, 1948–94,” unpublished dissertation, Cornell University, 1995, pp. 274–321. For a more general argument about the impact of foreign training on India's economic policy see Devesh Kapur's article in this volume. 50 The best source for discussion of India's response to the FSF initiative is Y. V. Reddy (deputy governor, RBI), “Implementation of Financial Standards and Codes: Indian Perspective and Approach,” Address to the Conference on International Standards and Codes, organized by the IMF and World Bank, Washington, DC, March 7–8, 2001. Via www.rbi.org.in. 51 Report of the Advisory Group on Securities Market Regulation,” Reserve Bank of India, Mumbai, May 14, 2001, via the RBI website, www.rbi.org.in. The quote on rolling settlement is from p. 13. 52 Author's interview with S. A. Dave, Mumbai, June 13, 1999. 53 Rajeshwari Adappa Thakur, “IMF Aid May Be Sought for Financial Reforms,” The Economic Times, November 22, 1999. 54 “Sebi, NZ Regulator in Talks,” Business Standard, February 14, 1998. 55 V. Raghunathan, “Dealing with PNs,” The Economic Times, August 8, 2000. 56 “Rolling Settlement for All Shares Soon: Sinha,” BusinessLine, November 24, 1999. Rolling settlement for India's most heavily traded shares was introduced only on July 2, 2001 after a major scandal earlier in the spring of 2001. 57 “Derivatives Trading Round the Corner,” The Economic Times, November 24, 1999; and “SEBI Set to Allow Trading on the Net by January,” Hindustan Times, November 24, 1999. Derivatives trading was introduced in June 2000. 58 “Essential Elements of Governance Code May be Made Mandatory,” Business Line (Chennai) November 24, 1999. 59 Ministry of Finance, Government of India, Economic Survey 1995–96 (New Delhi: Government of India Press, 1996), p. 65. 60 Vivek Law, “Sebi Set to Cast Wide Net,” Business Standard, July 20, 1999; and “SEBI Sets up Panel on Online Trading,” Business Line (Chennai), November 25, 1999. 61 Sangita Shah, “IOSCO, CPSS Stress on T+1 Cycle,” Business Standard, May 1, 2001. 62 Indian Securities Market: A Review (Mumbai: National Stock Exchange, 2001), pp. 20–36. See also “India: NSE Study Spots Lacunae in IOSCO Norms Compliance,” Business Line (Chennai), December 8, 2000. 63 “Forum of Bourses of Six SAARC States Launched: CTG Exchange Chief Elected President of SAFE,” The Independent (Bangladesh), January 17, 2000. 64 Michael Moran, The Politics of the Financial Services Revolution: The USA, UK and Japan (London: Macmillan, 1991). 65 Author's interview with Bhagirat Merchant, Mumbai, August 12, 1999. 66 “Brokers Pick Holes in Sebi Recommendations,” Business Standard, August 31, 1989. 67 For a colorful description of this position see the description of the powerful broker Manu Manek in S. N. Vasuki, “Manu Matters,” Business India, April 4, 1988, p. 55. 68 Author's interview with M. G. Damani, Mumbai, August 9, 1999. 69 Author's interview with Kamal Kabra, August 17, 1999. 70 Author's interview with Bhupen Dalal, Mumbai, July 31, 1999. 71 Roy Pinto and R. K. Upadhyay, “The Stockmarkets: What is the Way Out?” Business India, March 28, 1994, pp. 55–60. 72 “Roy Pinto: NSE: The Second Contender,” Business India, November 21, 1994, p. 221. 73 Roshni Jayakar, “A Head-on Confrontation,” Business Today, April 22, 1993, pp. 44–7. 74 High Powered Study Group on Establishment of New Stock Exchanges, “Summary of Recommendations,” unpublished mimeo, June 30, 1991, pp. 3, 10. 75 Jayakar, “Confrontation,” pp. 44–47. 76 “Proposed National Stock Exchange: Finance Ministry Calls for Debate,” Economic Times, August 28, 1991. 77 See comments of Ravi Narain, then deputy managing director of the NSE, in Hema B. Rajshekar, “NSE: Ensuring Safety,” Business India, May 20, 1996, p. 180. 78 “Consultant Debunks National SE Plan,” Business Standard, January 22, 1992. 79 A. Thothathri Raman, “National Stock Exchange: Future Movement,” Business India, January 18, 1993, pp. 89–90. 80 Debashis Basu and Roshni Jayakar, “Battle for the NSE,” Business Today, April 22, 1993, pp. 38–42. 81 For an excellent discussion of the evolution of India's agricultural policy see Ashutosh Varshney, Democracy, Development and the Countryside: Urban Rural Struggles in India (Cambridge: Cambridge University Press, 1995). The greatest institutional change in India's agricultural sector occurred in the 1960s. It was brought about through a process of adopting internationally available technology that became known as the “Green Revolution.”
Publication Year: 2004
Publication Date: 2004-10-01
Language: en
Type: article
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