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Essays On India's Credit Market and Macroeconomy

This document provides an abstract for an essay examining the effects of credit markets on India's macroeconomy from the perspectives of credit cycles and credit reallocation. The first essay analyzes credit and business cycle interactions at aggregated and disaggregated levels in India, finding the business cycle precedes the credit cycle. The second examines credit reallocation across Indian businesses, finding substantial gross credit flows are masked by underlying net credit growth. The third examines the validity of the Schumpeterian cleansing hypothesis in India, finding economic downturns induce efficiency-enhancing reallocation in manufacturing but not services, and no cleansing effect during Asian/global financial crises.

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Katyayan Rajmeet Upadhyay
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55 views2 pages

Essays On India's Credit Market and Macroeconomy

This document provides an abstract for an essay examining the effects of credit markets on India's macroeconomy from the perspectives of credit cycles and credit reallocation. The first essay analyzes credit and business cycle interactions at aggregated and disaggregated levels in India, finding the business cycle precedes the credit cycle. The second examines credit reallocation across Indian businesses, finding substantial gross credit flows are masked by underlying net credit growth. The third examines the validity of the Schumpeterian cleansing hypothesis in India, finding economic downturns induce efficiency-enhancing reallocation in manufacturing but not services, and no cleansing effect during Asian/global financial crises.

Uploaded by

Katyayan Rajmeet Upadhyay
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Essays on India’s Credit Market and Macroeconomy

Abstract
Historically, credit markets have played a pivotal role in fostering economic growth in almost
all nations, including those with fully developed capital markets. However, opinions still
diverge on whether financial development stimulates economic development in a causal
sense. Recent research has emphasized that credit market imperfections, which inherently
exist in all economies, may cause frictions in an economy that can plant the seeds of future
financial crises and lead to misallocation of resources, with adverse implications for long-
term growth and social welfare. Moreover, the global financial crisis of 2008–09 reinforced
the notion that credit plays a significant role in amplifying and propagating the fluctuations in
economic activity. So, the issues of credit growth and credit quality, which the conventional
macroeconomic paradigm has largely disregarded, appear to have become essential
components of modern macroeconomic analysis. In this framework, the current thesis
examines the effects of credit markets on the macroeconomy from the perspective of credit
cycles and credit reallocation.
First essay aims to understand the dynamics of credit and business cycle interactions at the
aggregated and disaggregated (sectors and industries) levels in the Indian context. We date
the credit and business cycles using parametric and non-parametric approaches and calculate
the lead-lag measures. We also test for synchronizing credit and business cycles and finding a
procyclicality during the crisis period. However, the sectoral and industry-level analysis
exhibit asymmetry as some sectors exhibit countercyclically. The business cycle precedes the
credit cycle at the aggregated and disaggregated levels. The repo rate, broad money, real
exchange rate, and industrial output significantly explain India’s business-credit dynamics.
Second essay examines the process of credit reallocation across Indian businesses on the lines
of Davis & Haltiwanger (1992) for measuring job reallocation. Using the unique firm-level
dataset for over 30 years, we find that substantial gross credit flows are masked by underlying
net credit growth at any phase of the business cycle. We find that the credit reallocation is
intense, and the majority of credit reallocation occurs within a group of firms similar in size,
governance, or industry. We also find that credit destruction is more volatile than credit
creation and excess reallocation fluctuates countercyclically over the business cycle. The
findings suggest that heterogeneity in credit market dynamics is a prime source of credit
reallocation evolution.
Third essay examines the validity of the Schumpeterian cleansing hypothesis, economic
downturns force inefficient firms off the market, freeing resources that can be allocated to
more efficient firms. Friction may inhibit this efficient allocation of resources in a developing
country like India. We investigate whether the view that recessions have a silver lining by
fostering efficient resource allocation holds true by utilizing the comprehensive micro-level
data for publicly traded firms, including industrial and service firms, from 1988 to 2020. We
find that reallocation is generally efficiency-enhancing, i.e., credit flows from low-productive
firms to high-productive firms, and normal economic downturns induce this efficiency-
enhancing reallocation. Our findings suggest that economic downturns induce efficiency-
enhancing reallocation in manufacturing but not services. However, we find no evidence of a
cleansing effect during the Asian and a modest cleaning effect during the global financial
crises. We observe that reallocation was an efficiency reduction during India’s financial
crisis, which contradicts the cleansing effect. Our findings show that financial constraints on
productive firms could be one of the potential explanations for the lack of a cleansing effect.

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