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Financial Development and Growth in India: A Growing Tiger in a Cage?

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  • Hiroko Oura
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    Abstract

    This paper examines the efficiency of the different segments of India's financial system using firm-level data on corporate financing patterns. Firms are increasingly relying on external funds to finance their investment in most recent years. Empirical analyses indicate that (1) the financial system in India is not channeling funds into industries with higher external finance dependence; (2) the debt financing system does not allocate funds according to firms' external finance dependence, while equity financing system does; and (3) firms in an industry that are more dependent on external finance grow more slowly.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/79.

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    Length: 76
    Date of creation: 01 Mar 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/79

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    Related research

    Keywords: Financial systems; Corporate sector; Economic growth; Debt management;

    This paper has been announced in the following NEP Reports:

    References

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    1. Alain de Serres & Shuji Kobayakawa & Torsten Sløk & Laura Vartia, 2006. "Regulation of Financial Systems and Economic Growth," OECD Economics Department Working Papers 506, OECD Publishing.
    2. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
    3. Tadesse, Solomon, 2002. "Financial Architecture and Economic Performance: International Evidence," Journal of Financial Intermediation, Elsevier, vol. 11(4), pages 429-454, October.
    4. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June.
    5. Franklin Allen & Douglas Gale, 1995. "Financial Markets, Intermediaries, and Intertemporal Smoothing," Center for Financial Institutions Working Papers 95-02, Wharton School Center for Financial Institutions, University of Pennsylvania.
    6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
    7. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
    8. Allen, Franklin & Chakrabarti, Rajesh & De, Sankar & Qian, Jun & Qian, Meijun, 2006. "Financing firms in India," Policy Research Working Paper Series 3975, The World Bank.
    9. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series, in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
    10. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    11. E. P. Davis, 2001. "Multiple Avenues of Intermediation, Corporate Finance and Financial Stability," IMF Working Papers 01/115, International Monetary Fund.
    12. Chang-Tai Hsieh & Peter Klenow, 2009. "Misallocation and Manufacturing TFP in China and India," Working Papers 09-04, Center for Economic Studies, U.S. Census Bureau.
    13. Boyd, John & Smith, Bruce, 1996. "The Coevolution of the Real and Financial Sectors in the Growth Process," World Bank Economic Review, World Bank Group, vol. 10(2), pages 371-96, May.
    14. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
    15. Bronwyn H. Hall, 1988. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
    16. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, 02.
    17. Thorsten Beck & Ross Levine, 2002. "Industry Growth and Capital Allocation: Does Having a Market- or Bank-Based System Matter?," NBER Working Papers 8982, National Bureau of Economic Research, Inc.
    18. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
    19. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
    20. Dani Rodrik & Arvind Subramanian, 2004. "Why India Can Grow at 7 Percent a Year or More: Projections and Reflections," IMF Working Papers 04/118, International Monetary Fund.
    21. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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    Citations

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    Cited by:
    1. Jahangir Aziz, 2008. "Deconstructing China’s and India’s Growth: The Role of Financial Policies," Working Papers id:1714, eSocialSciences.
    2. Jahangir Aziz, 2008. "Deconstructing China’s and India’s Growth - The Role of Financial Policies," Macroeconomics Working Papers 22142, East Asian Bureau of Economic Research.
    3. C Niranjan Rao, 2008. "The Role of Intellectual Property Rights in Information and Communication Technologies," Working Papers id:1742, eSocialSciences.
    4. Jahangir Aziz, 2008. "Real and Financial Sector Linkages in China and India," IMF Working Papers 08/95, International Monetary Fund.

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