Imperfect Capital Mobility as a Constraint on Regional Industrial Growth: Evidence from India

This paper provides evidence that as a result of poor mobility of capital within India, regional wealth constrains the growth of regional manufacturing. It shows that capital market imperfections can help explain the uneven pattern of industrial growth across regions in India. I exploit a policy-induced exogenous increase in the supply of credit to an identifiable set of factories in 1998 to demonstrate that the relative cost of credit to manufacturers are higher in regions with less wealth . Credit constraints on the growth of factories are identified through within-district growth differentials between factories that received more credit and those that saw a decline in the availability of credit. I show that this differential was greater in regions with less wealth, implying that it is in the poorer regions where more new factories were set up in response to a credit shock.