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Productivity, investment slowdown, and misallocation: evidence from Indian manufacturing

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  • Sarthak Basu

    (Indian Institute of Technology Madras)

  • Subash Sasidharan

    (Indian Institute of Technology Madras)

Abstract

Using rich firm-level data of around 12,000 firms over 2004–2016, this study attempts to identify the factors responsible for the slowdown in gross investment and productivity in Indian manufacturing post-Global Financial Crisis. Our analysis reveals that the decline in investment is more pronounced for firms with higher productivity. Furthermore, we find evidence indicating a slowdown in the flow of capital and labor from less productive to more productive firms post-Global Financial Crisis. This indicates that a part of the fall in investment can be attributed to a decline in allocative efficiency, which is likely to have an impact on both aggregate productivity and income. Moreover, we probe into the causes behind the slowdown in the relationship between firm productivity, investment, capital and labor growth. We find that credit misallocation, financial constraints, age, and firm size played key roles in the investment slowdown. Finally, we present a counterfactual scenario by analyzing the extent of extra output and aggregate productivity that could be generated in the absence of misallocation.

Suggested Citation

  • Sarthak Basu & Subash Sasidharan, 2025. "Productivity, investment slowdown, and misallocation: evidence from Indian manufacturing," Journal of Productivity Analysis, Springer, vol. 63(1), pages 17-36, February.
    • Handle: RePEc:kap:jproda:v:63:y:2025:i:1:d:10.1007_s11123-024-00730-6
    DOI: 10.1007/s11123-024-00730-6
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    More about this item

    Keywords

    L60; E22; D24; D61; O11;
    All these keywords.

    JEL classification:

    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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