“Up in the Downturn”: Was There Any Role of the US Subprime Crisis on the Slump in Growth of India's Manufacturing Sector Between 2007 and 2010?

Abstract

There is a rich literature which states that India did not suffer much from the impacts of the US financial crisis, but there is a school of thought which believes that the idea of India being insulated or decoupled from the contagion on account of limited integration into the world economy has been proved to be wrong. What is interesting is the focus has always been on the services sector and not on the manufacturing sector in India. In this background, this chapter tries to understand whether manufacturing sectors' productivity growth was one of the reasons that the crisis worsened in India or was it because of the crisis that India's manufacturing sector went into a deep recession. To look into the causality issue, the author estimates the productivity loss index (PLI) for the Indian industries during the period between July 2007 and July 2010 by estimating the fall in growth percentages in consecutive months for a total of 9,000 manufacturing, mining, and electricity industries. The data at monthly level have been retrieved from the Centre for Monitoring Indian Economy (CMIE) Prowess database. Based on the causality results, the chapter shows that it was because of the subprime crisis that India's manufacturing sector went into a deep recession. Using a probit model, the chapter also estimates the probability of the US subprime crisis being responsible for the productivity loss in India's manufacturing sector during the above-mentioned period.