The Political Economy of Financial Services Reform in India: Explaining Variations in Political Opposition and Barriers to Entry

This article offers an explanation for disparities in the speed and level of political opposition to reform of the financial services sector in India. Focusing on the disparity of outcomes in reform of the insurance and the banking sector, the author suggests why some barriers to entry were present in India during the reform process. The author extends this argument to explain differing levels of political opposition to reform in the banking and insurance sectors. To provide empirical support for this theoretical construct, the author uses measures of market segmentation and market concentration to show how specific forms of state ownership helped promote divergent types of political opposition that built in India during the decision-making stage of reform and during the implementation of second-generation reforms. The experience of financial services reform in India offers important lessons for the new institutional economics literature on early transition elsewhere.