Abstract:
This paper analyses the determinants of fixed investment in the
Indian Private Corporate Manufacturing sector for the period 1973-2002,
using Annual Survey of Industries Data. It is argued that economic policy
of a nation is crucial in determining the investment behaviour in
developing countries rather than the traditional factors like output and
profit. Against the background of the financial sector deregulation
initiated in India since 1991, this study makes an attempt to analyse
whether the traditional factors or the economic policy variables plays a
major role in determining investment behaviour. A reduced form equation
derived from the neoclassical investment theory is used for the empirical
analysis. Financial Liberalisation Index is constructed for India for the
analysis. The results show that, the traditional determinants like output
and profit still plays a major role in determining corporate investment
rather than the policy variables. Though aggregate financial liberalisation,
and more prominently domestic financial liberalisation produced an
environment conducive for investment, it could not succeed in creating
a sustained increase in capital formation in the post reform period. In
other words, firms consider the demand factor, internal liquidity position
and past investment decisions etc as the major indicators for future
investment. Only index shows strong positive association with corporate
investment is index of money market liberalisation. It is also found that
there is significant negative association between index of capital account
liberalisation and corporate investment. The negative and significant
relationship with index of capital account liberalisation and investment
raises many concerns over the credibility of external (international)
financial reforms.
