An autonomous research institute under the Ministry of Finance


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

Publication date

Aug, 2021


NIPFP Working Paper No. 339


Manmohan Agarwal and Rumi Azim


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.
Keywords: Capital structure, Investment, Profitability, Manufacturing, India
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