Research

• Understanding the credit cycle and business cycle dynamics in India [Link]

The 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 explore both parametric and non-parametric time-series approaches to date the major turning points and calculate the lead-lag measures. We also test for synchronizing credit and business cycles and find that there is a procyclicality during the crisis period. However, the analysis at sectoral and industry levels exhibits 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.

• Credit Creation, Credit Destruction, and Credit Reallocation: Evidence from India [Link]

The second essay examines the process of credit reallocation across Indian businesses by applying the methodology proposed by 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. Our results reveal that 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.

• Do recessions induce Schumpeterian creative destruction process? Micro-evidence from India [Link]

The third essay examines the validity of the Schumpeterian cleansing hypothesis, economic downturns force inefficient firms off the market, thereby 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 analyse whether the view that recessions have a silver lining by fostering efficient resource allocation holds true by utilising the comprehensive micro-level data for publicly traded firms, including both 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 results suggest that economic downturns induce efficiency-enhancing reallocation in manufacturing but not in services. However, we find no evidence of a cleansing effect during the Asian and a modest cleaning effect during the global financial crises. We do observe that reallocation was efficiency reducing 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.