Indian Manufacturing Sector in Post-Reform Period : An Assessment of the Role of Macroeconomic and Firm-Specific Factors in Determining Financial Performance

The book outlines the importance of Indian manufacturing sector and its growth under alternative policy regimes. The authors highlight the significance of various firm-specific and macroeconomic factors on the level of efficiency and profitability of the firms operating in the diverse manufacturing sector during the post-liberalization era. The book also examines the dynamic relationship between the select manufacturing sector-specific stock market indices and the various macroeconomic variables. Dr. Sumit Kumar Maji is Assistant Professor at the Department of Commerce, University of Burdwan, West Bengal, India. Dr. Arindam Laha is Professor at the Department of Commerce, University of Burdwan, West Bengal, India. Dr. Debasish Sur is Professor at the Department of Commerce of the University of Burdwan, West Bengal, India Preface 5 Contents 7 About the Authors 8 Abbreviations 10 List of Figures 12 List of Tables 14 1 Introduction 16 1.1 Need for Manufacturing Sector 17 1.2 Financial Performance Indicators of the Manufacturing Sector and Their Linkages with Economic Factors: A Conceptual Framework 22 1.3 Microeconomic (or Firm-Specific) Factors 22 1.3.1 Age of the Firms 22 1.3.2 Size of the Firms 23 1.3.3 Leverage 24 1.3.4 Liquidity 25 1.3.5 Intellectual Capital 25 1.3.6 Openness of the Firm 25 1.4 Industry-Specific Factors 26 1.5 Macroeconomic Factors 26 1.5.1 Economic Growth 27 1.5.2 Exchange Rate 27 1.5.3 Foreign Investment 28 1.5.4 Inflation 28 1.5.5 Money Supply and Rate of Interest 29 1.5.6 Oil Price 29 1.5.7 Stock Market Integration 30 1.5.8 Economic Policy 31 1.6 Selection of Sample Firms 31 1.7 Innovativeness of the Book 33 2 Manufacturing Policies in India: A Disaggregated Analysis 34 2.1 Introduction 34 2.2 Industrial Policy—An Overview 35 2.2.1 Period of Regulation (1947–1980) 37 2.2.2 Period of Deregulation (1980 onwards) 37 2.3 Manufacturing Sector-Specific Policy Initiatives 38 2.4 Changing Landscape of Industrial Development in India 41 2.4.1 Contribution of Industry in GDP 42 2.4.2 GDP Growth Rate of Manufacturing Sector 43 2.4.3 Gross Fixed Capital Formation (GFCF) in Manufacturing Sector 48 2.4.4 Trend of Capital–Output Ratio of Manufacturing Sector 49 2.5 A Sum Up 51 3 Factors Affecting Financial Performance of Firms: An Exploration of the Existing Research Works 52 3.1 Introduction 52 3.2 Research Studies in Foreign Countries 53 3.2.1 Financial Performance Analysis 53 3.2.1.1 Macroeconomic Factors 53 3.2.1.2 Microeconomic Factors 54 3.2.1.3 Other Factors 54 3.2.2 Efficiency Analysis 55 3.2.2.1 Macroeconomic Factors 55 3.2.2.2 Microeconomic Factors 55 3.2.2.3 Other Factors 56 3.2.3 Stock Market Analysis 56 3.2.3.1 Macroeconomic Factors 57 3.2.3.2 Microeconomic Factors 58 3.2.3.3 Other Factors 58 3.3 Evidence Gap Map (EGM): Evidence on the Existing Empirical Literature in India 59 3.4 Research Gap 59 3.5 Objectives of the Study 65 References 66 4 Measurement of Efficiency of the Select Indian Manufacturing Firms and Its Determinants: Implications of Firm-Specific and Macroeconomic Factors 83 4.1 Introduction 83 4.2 Measurement of Efficiency and Its Determinants 85 4.3 Results and Discussion 88 4.3.1 Estimation of Stochastic Production Function: 88 4.4 Measurement of Efficiency 90 4.5 Descriptive Statistics of the Firm-Specific Factors 91 4.6 Determinants of Efficiency 93 4.6.1 Leverage 93 4.6.2 Openness 95 4.6.3 Size 95 4.6.4 Growth 96 4.6.5 Age 96 4.6.6 Exchange Rate 96 4.6.7 Inflation 97 4.7 A Sum Up 97 References 98 5 Implications of Various Macroeconomic and Firm-Specific Factors on the Financial Performance of the Select Indian Manufacturing Firms 103 5.1 Introduction 103 5.2 Sector-Wise Measurement of Profitability 105 5.3 Determinants of Profitability: Implications of Firm-Specific and Macroeconomic Factors 109 5.3.1 Leverage 110 5.3.2 Liquidity 112 5.3.3 Intellectual Capital 113 5.3.4 Size of the Firm 113 5.3.5 Age of the Firm 114 5.3.6 Growth of the Firm 114 5.3.7 Openness of a Firm 115 5.3.8 Index of Industrial Production 115 5.3.9 Exchange Rate 116 5.3.10 Inflation 116 5.4 A Sum Up 117 References 118 6 Interrelationship Between Macroeconomic Fundamentals and Sector-Specific Stock Indices of the Indian Manufacturing Sector 122 6.1 Introduction 123 6.2 Trend of Sectoral Manufacturing Stock Indices 124 6.3 Relationships Between Sectoral Stock Indices and Macroeconomic Factors 125 6.3.1 Step 1—Selection of Macroeconomic Factors and Sector-Specific Stock Indices 127 6.3.2 Step 2—Testing Stationarity 128 6.3.3 Step 3—Choosing an Appropriate Model 131 6.3.4 Step 4—Measurement of Long-Run Elasticity 131 6.3.5 Economic Policy Uncertainty 133 6.3.5.1 Foreign Investment 134 6.3.5.2 Interest Rate 134 6.3.5.3 Exchange Rate 135 6.3.5.4 Price Factor 136 6.3.5.5 Oil Price 137 6.3.6 Step 5—Measurement of Short-Run Elasticity 137 6.4 Structural Break 139 6.4.1 First Stage 139 6.4.2 Second Stage 140 6.5 A Sum Up 140 References 141 7 Summary and Policy Implications 146 7.1 Overview of the Book 146 7.2 Summary of the Findings and Concluding Observations 148 7.2.1 Basic Metal 152 7.2.2 Industrials 152 7.2.3 Fast Moving Consumer Goods 152 7.2.4 Health Care 152 7.2.5 Consumer Discretionary Goods and Services 152 7.3 Policy Implications of the Study 153 7.4 Future Research Agenda 154 Bibliography 157 Index 183