Investment, Uncertainty and Credit Market Imperfection in India

Vikash Gautam () and Vikash Vaibhav ()

Journal of Quantitative Economics, 2017, vol. 15, issue 2, No 4, 265-289

Abstract: Abstract The paper attempts to make a timely contribution to the debate on the status of business fixed investments in Indian private manufacturing firms. There are two key issues on which the debate hinges: lower presence of formal credit and, procedural and contractual rigidities. Lower presence of formal credit restricts or makes it costlier for a group of firms to incur investment expenditure that they would have incurred otherwise. Such firms predominantly rely on their internal funds for investment. Procedural and contractual rigidities, on the other hand, make almost all the investment projects undertaken, partially or completely, irreversible. Firms respond to such irreversibilities by aligning their investment to a relatively favorable time which, in turn, depends on the way firms process future uncertainty. The analytical exercise endogenously distinguishes between two investment regimes based on the access to external credit and uses a set of characteristics, along with different measures of uncertainty, to explain fluctuations in investment. The results provide three important observations. First, in the post-reform period there has been an adverse shift in the investment financing policy. Second, firms with inferior access to external credit are smaller, younger, pay less dividend, export less and belong to an industry with inferior demand than others. Such firms invest by running down their available cash flows and selling assets. Third, macroeconomic uncertainty depresses investment whereas microeconomic uncertainty has no impact on investment.

Keywords: Business fixed investment; Uncertainty; Credit market imperfection; Asset sales (search for similar items in EconPapers)
JEL-codes: D21 D82 G3 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s40953-016-0048-1

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