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The Differential Effects of Financial Development on India's Industrial Performance

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  • Nitin Gupta

Abstract

The paper aims to investigate the differential impact of increased financial development on industrial output, across state and industry categories. Using an unbalanced panel of 15 Indian states, 22 industries at the 2-digit level, and an 11-year period spanning 1992-2002, the paper's most novel contribution comes from hypothesising and testing for operating channels though which increased financial depth benefits output. It is concluded that financial depth facilitates increased use of contract labour by industries, which in turn mitigates the effects of industrial disputes and increases output. This beneficial impact is uniformly felt across the country, regardless of state-level labour regulations. However, financial depth has failed to directly benefit industries with the greatest need for external financing, i.e. those with moderate and high dependence on external sources of finance. Overall, increased financial depth alleviated the working capital constraints of firms, but not their investment constraints. The negative effects of the latter outweigh the positive effects of the former, and help explain the sharp deceleration of growth across industries categories. Finally, the paper makes the dual case for comprehensive labour reforms and for policies to improve quality of intermediation in Indian financial markets.

Suggested Citation

  • Nitin Gupta, 2011. "The Differential Effects of Financial Development on India's Industrial Performance," ASARC Working Papers 2011-12, The Australian National University, Australia South Asia Research Centre.
  • Handle: RePEc:pas:asarcc:2011-12
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    File URL: https://crawford.anu.edu.au/acde/asarc/pdf/papers/2011/WP2011_12.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade & Labour Market Interaction; Dispute Resolution; Industrial Policy; Manufacturing; Financial Markets;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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