Credit constraint and intra-country production reorganization – Evidence from the unorganized textile industry in Maharashtra

Purpose - Evidence suggests that unorganized manufacturing units are extremely credit-starved. The purpose of this paper is to study the effect of such credit unavailability for small firms, and to see if it has altered the erstwhile production organization in a way which 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. Design/methodology/approach - Based on data collected from two textile clusters in Maharashtra, India, the study shows that credit unavailability has led small firms to increasingly work for bigger firms as outsourced units. The paper uses a measure of technology and productivity to undertake logistic regression and sub-sample regressions to confirm production reorganization resulting from credit unavailability. This would provide additional insights for standard measures of intra-country intra-industry trade Findings - The exclusion of the unorganized production units from the formal lending process has, over the years, led to a reorganization of the existing production structure, whereby the small firms are forced to work for bigger formal firms on piece-rate basis. To circumvent their credit issues, the small unorganized sector firms have increasingly started to work for bigger firms as outsourced units. Originality/value - This is an original research work. The paper fulfils the identified need of addressing how the plaguing social issue of financial exclusion of unorganized firms has led to production reorganization.