Law and Finance in India – An Overview

The central role of legal reforms in sustaining economic growth and financial development is widely recognized in India. Exactly what elements of the legal system affect the financial system and how, are less clear. We review the recent literature on law and finance and assess the state of India’s legal and judicial system as well as that of its financial system, particularly relative to the rest of the world. It appears that on paper Indian laws provide good to excellent protection to investor rights. Implementation of these laws, however, has been less than satisfactory. Public enforcement of securities laws has been weak and courts in India have been extremely slow and overloaded with cases. Even a decade and a half after the beginning of the reforms process, India still suffers from an excess of red-tape and bureaucracy (not to speak of corruption) poses hurdles to every major aspect of business. Indian financial markets have had limited though increasing depth and survey evidence reveals the preponderance of internal financing among India’s small and medium sector firms as well as marked reliance of Indian small businesses on informal networks and institutions like reputation and trus t rather than the formal legal system to enforce contracts and settle disputes.