The effects of financial liberalization on productivity: Evidence from India’s manufacturing sector

Abstract

Using a panel of India’s registered manufacturing firms and both economy-wide and firm-level financial data, we investigate the effects of India’s financial liberalization on the productivity of its manufacturing sector in the 1990s and 2000s. Our dynamic panel analysis shows that the series of financial liberalization policies/measures, at both the macro and micro levels, significantly enhanced the productivity of the manufacturing sector. Total factor productivity increased for all firms, including those owned by the state government, with greater gains for the firms in the private and foreign sectors. Our results suggest that policies favoring financial liberalization should be pursued further in order for India to foster higher economic growth.

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