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Paradox of external finance in the Indian manufacturing sector

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  • Pradeepta Sethi

Abstract

Purpose - This paper aims to examine how financial development affects the growth of industries that are more dependent on external finance, demystifying the roles played by the banks, stock and bond markets. Design/methodology/approach - The authors apply panel fixed-effects and dynamic panel generalized methods of moments on disaggregated industry-level data of the Indian manufacturing sector for the period of 2001-2015 to examine the relationship between financial development, banking market structure and economic growth. Findings - The study finds that financial development has a significant impact on the growth process by reducing cost of external finance. Among the three sources of finance, the study finds that while the banking sector has been the most preferred source of external finance, increasing concentration and selective disbursement of credit have continued to dent the prospects of the industry. This paradoxical result explains the dismal performance of the Indian manufacturing sector. Originality/value - The effect of financial development (encompassing banking market structure) on economic growth has received sparing attention. Related literature is unclear regarding the impact of banking market structure on the growth process in the context of emerging economies. The authors attempt to fill this important gap in the literature. Moreover, they add novelty to the literature by calculating the external dependence at the firm level, diverging from using US industry as a proxy for calculation of external dependence.

Suggested Citation

  • Pradeepta Sethi, 2018. "Paradox of external finance in the Indian manufacturing sector," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(1), pages 95-111, April.
    • Handle: RePEc:eme:jfeppp:jfep-08-2017-0069
    DOI: 10.1108/JFEP-08-2017-0069
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    Cited by:

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    2. Denila Jinny Arulraj & Thillai Rajan Annamalai, 2020. "Firms’ Financing Choices and Firm Productivity: Evidence from an Emerging Economy," International Journal of Global Business and Competitiveness, Springer, vol. 15(1), pages 35-48, June.

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    More about this item

    Keywords

    Banks; Manufacturing sector; Economic development: Financial markets; Financial institutions and services; Market structure; Financial dependence; Industrial growth; G2; L6; O4;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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