THE INDIAN MANUFACTURING SECTOR: FINANCE, INVESTMENT AND PERFORMANCE OF FIRMS

Abstract

: The purpose of this paper is to explain the manufacturing stagnation in India, particularly, examining the hypothesis that financial stress caused the stagnation. Using a sample of 804 large, mid, and small cap manufacturing firms in India from Prowess database, the paper examines the performance of manufacturing sector during 2005-19 using simple financial indicators and dynamic panel data regression analysis. We estimate the structural equations of investments, leverage and profitability using a two-step Generalized Methods of Moments estimation. We do not find substantial support for the hypothesis that financial stress explains the investment slowdown in these firms. Our findings suggest that manufacturing firms, particularly the larger firms, are practicing debt conservatism. We also find that the declining growth in sales is a major determinant in explaining the slowdown in fixed investments and profits of these firms. In addition, the size of the firms measured in terms of sales also matters for small cap firms. We therefore suggest that measures to increase demand can help in reviving the sales growth of firms and thereby private investments and profits.