Pattern and Trends of Financing in the Indian Manufacturing Sector

The firm’s choice to finance its asset reveals the pattern of flow of funds, the availability and reliance on sources of such funds. We study ‘Sources of fund’ statement for an unbalanced panel of nearly 3400 firms in the manufacturing sector during the financial year 2011–2018. We find that financing has been mostly met through internal sources, and the reliance on external financing has decreased during this period. We introduce a methodological improvement by studying change in total assets to understand financing. A series of empirical models was formulated to identify factors that influences external financing. The result shows that unlisted, non-exporting, new-aged and small-sized firms have higher share of external financing. Further, profitability ratios like return on asset and operating profit margin, tangibility ratio like gross fixed assets to total assets, and reserves to total assets, shows negative and significant relationship with share of external financing to total funds and external financing to total assets. Our results add the dimension that interaction of change in assets with firm specific characteristics provides a meaningful way to extend the results of existing models. We argue that while existing methods use limited balance sheet items for analyzing internal versus external finance, firm level decisions ought to include all sources of finance. JEL Classifications: D22, G30, G32