From Knowledge.Wharton :
"In some respects, India seems to be doing everything wrong: regulatory protections for investors are weak, banks don't lend much money to small- and medium-size businesses, and the country's legal system is highly corrupt. Yet when it comes to growing its economy, India seems to be doing everything right.
ndeed, the study, "Financing Firms in India," challenges the conventional wisdom among academics and public policy experts that corruption automatically impedes economic advancement of developing countries, according to Wharton finance professor Franklin Allen, one of the authors of the study.
"The academic literature says developing countries need a good legal system and honest government to grow," Allen states. "We found, however, that a low level of corruption is not a significant impediment to growth because businesses can obtain financing and settle legal differences outside the legal system in ways that are quite effective."
"Small- and medium-size Indian companies have found ways to get around [the limitations of the country's financial and legal systems]," says co-author Sankar De, clinical professor and executive director of the Center for Analytical Finance at the Indian School of Business in Hyderabad. "They depend on informal mechanisms for dispute resolution. They lend and borrow from each other. In many ways, they bypass formal financial markets and courts of law."
A significant part of the study consisted of extensive surveys of non-state, non-listed private firms of small and medium size, one of the most successful sectors in the Indian economy. These firms have grown faster than the rest of India's economy during the past 15 years, even though the financing of this sector is clearly different from that of state and listed firms, according to Allen.
De notes that these businesses account for more than 40% of the total value added in Indian manufacturing. "Neither the absence of formal legal processes nor the [lack of] access to financial markets and credit seem to have impeded their growth rate," De says."
Pl. read the entire article and also Madhukar Shukla's comments on the informal sector here .