This paper analyzes the determinants of fixed investment in the Indian Private Corporate Manufacturing sector for the period 19732002, using Annual Survey of industries data. It is argued that economic policy of a nation is crucial in determining the investment behavior in the 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 attempts to analyze whether the traditional factors or the economic policy variables play a major role in determining investment behavior. A reduced form equation, derived from the neoclassical investment theory, is used for the empirical analysis. Financial Liberalization Index is constructed for India for the analysis. The results show that, the traditional determinants like output and profit still play a major role in determining corporate investment, rather than the policy variables. Though financial liberalization, more prominently domestic financial liberalization, produced an environment conducive for investment, however, it could not succeed in creating a sustained increase in capital formation.

The empirical literature on economic growth consistently shows that the rate of accumulation of physical capital or investment is an important determinant of economic growth. More importantly, in the developing countries, as evidenced by many studies, it is the private investment, rather than the public investment, that plays a greater role in determining economic growth.1 The studies on the determinants of private investment in the developing countries, contrary to the traditional theories of investment, focussed on the role of government policy and tried to derive an explicit relationship between the principal policy instruments and private investment (Blejer and Khan, 1994; Guncavdi
et al., 1998; Sioum, 2002). Recent theoretical and empirical studies have produced results consistent with the idea that the economic policy of a nation is crucial in determining the domestic investment behavior (Blejer and Khan, 1994; Greene and Villaneuva, 1991; Sioum, 2002; de Melo and Tybout, 1990).

Like many developing countries, India, with an objective of promoting economic growth through higher savings and investment, adopted various macro economic, trade and financial sector policies in 1991, as a part of the structural adjustment and macro economic stabilization programs. The old repressed regime has been replaced by a liberal financial policy regime. These policy changes are expected to have significant effect on the investment performance in the economy. The broad objective of financial sector reforms and other macro economic policies in India was to ensure that market-oriented financial sector contribute positively to economic growth by providing access to external funds and by channeling investment towards growing profitable industries and firms.

Applied Finance Journal, Empirical Literature, Financial Sector Policies, Economic Policies, International Monetary Fund , IMF, Gross Domestic Product, GDP, Fiscal Policies, Financial Sector Liberalization, Financial Markets, Center for Monitoring Indian Economy, CMIE, Index of Capital Market Liberalisation, Augmented Dickey Fuller Test, ADF, Vector Auto Regression, VAR.