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The Indian manufacturing sector: finance, investment and performance of firms

Author

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  • Agarwal, Manmohan

    (Centre for International Trade and Development, Jawaharlal Nehru University)

  • Azim, Rumi

    (Centre for International Trade and Development, Jawaharlal Nehru University)

Abstract

The paper tests the hypothesis that financial stress caused the stagnation in the manufacturing sector, using firm level data on a sample of 804 large, mid, and small cap manufacturing firms for 15 years from 2005 to 2019. We analyse the trend in the financial indicators and estimate dynamic panel data regression using a two-step GMM method. We do not find substantial for financial stress to be a major determinant of the investment slowdown in these firms. Our results support the Pecking order theory, particularly for larger firms. In addition, we find that the declining growth in sales is a major determinant in explaining the slowdown in fixed investments and profits. For small cap firms, the size of the firms also matters. We therefore suggest that measures to increase demand can help in reviving the sales growth of firms and thereby private investments and profits.

Suggested Citation

  • Agarwal, Manmohan & Azim, Rumi, 2021. "The Indian manufacturing sector: finance, investment and performance of firms," Working Papers 21/339, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:21/339
    Note: Working Paper 339, 2021
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    1. Chakraborty, Lekha, 2021. "Mainstreaming Climate Change Commitments through Finance Commission's Recommendations," Working Papers 21/341, National Institute of Public Finance and Policy.

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    Keywords

    Capital structure ; Investment ; Profitability ; Manufacturing ; India;
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