Firm Dynamics, Productivity and Demand Shocks: A Study of Indian Manufacturing Plants

Abstract: Firm growth in the Indian manufacturing sector has puzzled economists for many years due to the persistence of many small and unproductive plants. I study the importance of producer-specific demand, along with productivity and prices, for firm dynamics in this setting. First, I use micro-level panel data from India to estimate these measures at the plant and individual product levels. I find high dispersion and low persistence in these variables relative to the US data. Moreover, the rate of persistence varies by the category of producers with larger plants observing higher rates of persistence in productivity, which is further associated with a significantly higher persistence in demand shocks. Finally, I study the evolution in these measures over the life cycle of plants and show that productivity and prices increase over time with younger plants being the least productive but observing higher demand, a potential factor in their survival. This is in contrast to the US and thus, establishes an important distinction in the markets of the two countries. Furthermore, the results highlight the role of the idiosyncratic demand component in firm dynamics within the Indian manufacturing sector.