It is true that even in the developed countries informational failures ensure that these expectations with regard to benefits expected from stock markets are not always realized. But in shallow markets like India's, which are more manipulated than autonomous and where few players dominate the markets, these benefits are virtually absent. The big and not always efficient firms and traders dominate markets and garner benefits at the expense of medium and small players. Further, small players often gain at the expense of ordinary investors. Small firms, for example, manage to mobilize capital only when the market is in the midst of a speculative fever. And at such times many of these firms are fly-by-night operators seeking to who mobilize money from investors who burn their fingers when the collapse ensues. This is precisely what happened during the early 1990s.
 
Given these features of India's markets, the SEBI's decision to ban badla trading and other deferral products facilitating speculation cannot be faulted. The real criticism of the SEBI and the government relates to their willingness to either allow such practices from the past to continue, even in modified form, as in the case of badla, or to introduce them into the market, as was true of the stock-lending schemes. In fact, as part of the process of stock market 'reform' during the 1990s, the government at times actively encouraged such practices.
 
The proximate reason for the government's support of practices that facilitated speculation was the need to increase liquidity in the market in order to sustain its buoyancy. In fact, it is after the stock market lost the vibrancy it displayed during the scam years in the early 1990s that the badla market was sought to be revived, stock-lending schemes were instituted, and banks were encouraged to invest in and lend against shares. These were all seen as means of increasing liquidity in the market, in order to perk up trading volumes and prices.
 
But given the shallow nature of stock markets in India, making it a limited source of capital for productive investment, why was there so much concern with activity in the stock market? In fact, a number of observers have pointed out that on many an occasion monetary and fiscal policies of the government seemed to be obviously influenced by the desire to win the favour of market players. The government itself sought to explain the importance it gave to markets, by arguing that these markets can play the same roles of mobilizing and allocating savings on the one hand and monitoring and disciplining corporations on the other.
 
In actual fact, however, the concern with stock market performance was driven by the need to keep foreign institutional investors happy. Among the presumptions that underlay the strategy of liberalization were two of significance for our current discussion. First, that in the medium-term liberalization would trigger a boom in Indian exports, which would help finance the higher import bill that it may entail. This was to occur because liberalization would facilitate, by providing easy access to imported capital and technology and attracting foreign direct investment, the restructuring domestic economic activity along internationally competitive lines. Liberalization would also enforce such restructuring, because it exposes domestic economic agents to competition from abroad. The second presumption was that in the interim, liberalization would ensure the inflow of foreign portfolio and direct investment, allowing the country to finance without difficulty the higher deficit on the current account that it may entail. This was seen as crucial since the accelerated liberalization of the 1990s was triggered by the foreign exchange crisis of 1990-91, which showed that India was vulnerable on the balance of payments front. When the expected export boom does not materialize, as has happened with India, the strategy of attracting foreign investors becomes the bedrock of reform.
 
Thus, inflows of foreign investment were a critical component of the neo-liberal reform strategy. And a vibrant stock market was seen as a prerequisite for such inflows. Financial sector reform was seen as an important means to facilitating the entry of foreign investors into the country, as well as a device to ensure that India was an attractive destination for such investors. In this framework, debt-financed trading through the use of deferral products was a mechanism by which stock market vibrancy was to be sustained and foreign investors placated. It was for this reason that the encouragement of such practices was an essential part of financial sector reform.
 
However, shallow stock markets and speculation make crises as much a consequence of such liberalization as temporary vibrancy. Periodic crises have made clear that such markets do not serve the objectives of mobilizing and allocating capital and disciplining traders and corporations. It is this realization, brought home once again by the post-budget stock market crash, that has forced the government to retreat on carry-forward trading. In that sense, the recent initiatives are a retreat on the reform front. Fortunately, even if they do not help discipline private players, the markets seem to be capable of disciplining an errant government driven by a faulty perspective.