Financial Development and Growth in India: A Growing Tiger in a Cage?
IMF Working Papers, March 1, 2008
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- Financial Development and Growth in India: A Growing Tiger in a Cage?
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Bibliographic details
- Authors: Hiroko Oura
- Published: March 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869408.001
Key findings
- Firms are increasingly relying on external funds to finance their investment in most recent years.
- Empirical analyses indicate:
- (1) the financial system in India is not channeling funds into industries with higher external finance dependence;
- (2) the debt financing system does not allocate funds according to firms' external finance dependence, while equity financing system does;
- (3) firms in an industry that are more dependent on external finance grow more slowly.
Implications for financial intermediation and growth
- Allocation inefficiency: The Indian financial system appears to underperform in directing funds toward industries with greater external finance dependence, implying potential misallocation of capital across sectors.
- Debt vs. equity segmentation: Debt markets do not reflect firms' external finance needs in their allocation, while equity markets do, suggesting differential effectiveness across financial segments.
- Growth constraints: Industries with higher external finance dependence exhibit slower firm growth, indicating that insufficient or misallocated external finance may be a binding constraint on firm-level and industry-level growth.
Data and scope
- Analysis based on firm-level data on corporate financing patterns.
- Focus on comparative efficiency across different segments of India's financial system (debt financing system, equity financing system, overall financial system).