Credit Constraint and Intra-Country Production Reorganization - Evidence from the Unorganized Textile Industry in Maharashtra

Evidence suggests that unorganised manufacturing units are extremely credit starved. We study the effect of this credit unavailability for small firms and observe that it has altered the erstwhile production organization in a way that has led to the withdrawal of the small firms from both input and output market leading to increased production outsourcing between the formal and informal firms. Based on data collected from two major textile clusters in Maharashtra, India, we show that credit unavailability has led small firms to increasingly work for bigger firms as outsourced units. The paper also uses a measure of technology and productivity to point out that production re-organization resulting from credit unavailability should provide additional insights for standard measures of intra-country intra-industry trade