| Financial reforms in India in the 1990s had two major objectives. First, they were aimed at improving the allocational efficiency of investment by channeling funds towards profitable firms. Second, they were meant to create access for the corporate sector to more sources of funds. 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. From our subsequent analysis of the sources and uses of funds we infer 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. They were generally diverted towards speculative financial portfolios. Thus, the lack of an improvement in the index of efficiency of investment allocation can be partly ascribed to bad investments to begin with. Our analysis needs to be extended to more recent data, as they become available, to have a more robust picture of the same effect. |