Credit Creation, Credit Destruction, and Credit Reallocation: Firm-level Evidence from India

Abstract

The rapidly growing empirical studies find that the reallocation of physical and financial input across and within firms can be an essential productivity growth source. This paper 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.

Keywords: Credit reallocation, Credit growth, Heterogenous firm’s behavior, India

JEL Classification: E24, E44, G20