Abstract

Financial development is widely believed to promote productivity growth. In this paper we use firm level data to study the effects of financial development achieved through financial reforms on total factor productivity of India’s manufacturing sector between 1990 and 2008. We find evidence that financial development, measured at both macro and micro levels, has significantly enhanced firm-level TFP in the manufacturing sector. By using alternative indicators of financial development at the firm-level, we make a case that the firms in the Indian private sector need better access to bank credit, while the firms in the government sector and the foreign sector need access to the capital market. Our results suggest that policies favoring financial development should be pursued further in order for India to further increase its economic growth.