Critics of the theory of financial liberalization, with their forceful arguments, have attempted to prove that this theory is inherently inadequate as it fails to capture the contemporary experiences of the world and hence needs to be revisited or in extreme to be ignored. Some of these formidable criticisms finally inspired McKinnon (1989) to reformulate his alternative growth strategy and the theorist finally settled for a more pragmatic approach of `restrained financial liberalization'. All these criticisms, however, not necessarily imply that financial liberalization does not matter; of course, it does. But we emphasize that there is a need to refurbish and reformulate the neoclassical approach to accommodate the criticisms made against it, so as to develop a more correct, sensible and enlightened policy capable of supporting the change processes of Less Developed Countries (LDCs). This study proposes to review the policy of `financial liberalization' for an economy that is plagued by demand crisis, less than fuller capacity utilization and excess liquidity—ills that are conspicuously prevalent in the Indian economy. The study refrains from making any detailed analysis of the reasons—interventionists or changed policy environment contributed to the present state of unwarranted economic development—but prefers to focus on the following questions: (1) If financial system matters for development, will the continuation of present policy of financial liberalization help us effectively counter inadequacies of Indian economy; if not, are we the victims of `doctor is the disease' syndrome? (2) Is it realistic to assume that private initiative, coupled with some enlightened state intervention, can help solve more efficiently the problem of excess liquidity of our country? (3) And, is there any scope for public authorities to influence or suspend the operation of market forces to deal efficiently with the problems of macroeconomic management?

In the past one-and-a-half decades, numerous measures have been initiated to liberalize the Indian financial system. Many of these reforms were introduced in response to the need of the moment rather than as a part of a well-articulated strategy. Nevertheless, all these policies were designed to develop an efficient financial system capable of supporting the growth process of economy, and the measures virtually marginalized the Planning Commission which performed an important function in the earlier regime.

Our attempt to develop a market-oriented financial system capable of delivering the desired results are awfully frustrating. Decline in household savings, prolonged demand deficit and comparatively inadequate development of financial system are some typical challenges that Indian economy is confronting after the regime shift. These outcomes may be attributed to our main focus, which is in line with the neoclassical theory, on savings as the ultimate determinant of growth and on ensuring that economy stays close to its full employment growth path. Any intervention by the government may derail our economy. Thus, our policy prescriptions center around two broad issues: The first and the most important one is to what extent private initiatives be supplemented by state intervention to ensure faster growth of the economy. Second, given the structure of the financial system, is there any scope for public authorities to influence or suspend the operation of market forces in order to promote savings, investment and allocative efficiency of our system?

Applied Finance Journal, Financial Liberalization, Indian Economy, Less Developed Countries, LDCs, Economic Development, Financial Liberalization, Macroeconomic Management, Economic Growth, Macro-Management Policy, Social Marginal Productivity, Indian Financial System, Planning Commission, Self-Regulated Financial System.