Do recessions induce Schumpeterian creative destruction? Micro Evidence from India

Seema Saini, Wasim Ahmad and Gazi Uddin

Emerging Markets Review, 2024, vol. 59, issue C

Abstract: According to the Schumpeterian cleansing hypothesis, economic downturns force inefficient firms off the market, freeing resources that can be allocated to more efficient firms. India, as an emerging economy, may experience a similar reallocation. The study uses micro-level data for publicly traded firms, including manufacturing and services sector firms, from 1988 to 2020. We find that reallocation is productivity-enhancing in general, i.e., credit moves from firms with low productivity to firms with high productivity, and normal economic downturns induce this efficiency-enhancing reallocation. We also observe that reallocation is less efficiency-enhancing during the Indian financial crisis, and constraints on productive firms could be one of the potential explanations for the lack of a cleansing effect.

Keywords: Credit reallocation; Productivity; Cleansing effect; Severe economic downturns (search for similar items in EconPapers)
JEL-codes: E44 E51 G30 L25 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000013

DOI: 10.1016/j.ememar.2024.101106

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