Abstract:

          Since the last two decades, economy has achieved the moderate economic growth rate; notwithstanding, the economy is facing the serious challenge of downsizing the manufacturing sector. Several policy attempts has been made to revive the sector and has made concerted efforts to provide incentives to manufacturing firms. According to Global wage report 2016-17 “misallocation of resources within firms are driving the total inequality in the country as well as affecting the growth of firm” (pp-36). The goal of this paper is to analyze the relationship between financial developments, labour and product regulation on the firm growth and to understand, which microeconomic channel either the financial regulation effect or the labour and product market regulation affect the growth of Indian manufacturing firms. Primarily, we aim to study- Which institutional factors constraint the growth of Indian manufacturing firms? Existing literature on India, argues that the impact of financial development on firms ‘growth is heterogeneous across firms and industries and suggest that the aggregate economic growth is improved due to within-firm performance due to the market share reallocation across firms (Bas and Berthou, 2012). The growth in the size of manufacturing firms are largely constrained by stringent labour and product market regulations in India (Sapkal 2016; Topalova and Khandelwal, 2011). We study the heterogeneity in the product and labour market regulations across Indian states and the state level development of financial markets which provide us the staggered variations to study the differential impact of market combined with product and labour market regulation on the growth of manufacturing firms in India. The database is thus representative of small, medium-sized and large Indian firms. The dataset provided by CMIE-PROWESS covers the period 1998-2016 and the information varies by year for 21 Indian states. It provides quantitative information on sales, capital stock, income from financial and non-financial sources, consumption of raw material and energy, compensation to employees and ownership group. Overall we argue that the effect of financial market development is relatively stronger for stimulating the growth than product and labour market regulations. Although, it appears that labour market regulation could decelerate the growth of firms’; however, when we controlled for the macro trends, the estimated coefficient turn out to be almost negligible. These results imply that the growth of Indian manufacturing is affected by the capacity to attract external funds to invest as well as the possibility to adapt workforce to the business cycle. Our results are robust to alternative specifications that control for industry and characteristics and that address the concern of potential reverse causality. The policy inference drawn will be of great importance to the RBI to formulate the financial development plans and credit policy for Indian firms considering the intersecting and convoluted nature of product and labour market regulations in India. This study will also add to the existing scholarship on the behavior of firm and law and economics in emerging market economy like India.

Brief bio:

Dr. Rahul Suresh Sapkal is an Assistant Professor (Economics) at Maharashtra National Law University Mumbai. He holds a Degree in Law and Economics from European Doctorate Program in Law and Economics (Erasmus University Rotterdam, The Netherlands; University of Bologna, Italy; and University of Hamburg, Germany). He works in the areas of labor economics, law and , corporate governance, industrial relations, development economics, , and institutional economics. Prior to joining MNLU Mumbai, Dr. Sapkal has worked as a researcher with CORD-UNICEF; International Labor Organization, New Delhi and Tata Institute of Social Sciences, Mumbai. Dr. Sapkal has widely published and is a referee to various international economic journals of repute such as European Journal of Law and Economics, Economic and Political Weekly, Research in Sociology of Work, International Review of Income and Wealth, and Asian Journal of Law and Economics. Dr. Sapkal is in the governing board of Workers Solidarity Network of Action Aid (India) and International Labour Organization (New Delhi). Recently, he is awarded the prestigious Reserve Bank of India, Faculty Research Fellowship – 2017 and is a recipient of Azim Premji Research Grant for the academic year 2018 for the project titled,” ‘Judicial Quality, Contract Enforcement and the Firm Performance: Empirical Evidence from India”. Dr. Sapkal is working as an advisor to Aajeevika Bureau's legal aid, education and advocacy work that works with migrant and informal workers across Rajasthan, Gujarat and Maharashtra.