Political connections and credit access: evidence from small businesses and microenterprises in India

Abstract This paper examines the impact of political connections on credit access for small businesses and microenterprises (SBME) in India, utilizing data from the India Human Development Survey. While such connections can facilitate overcoming challenges like high transaction costs and incomplete credit markets, they may also impede equitable credit access. This study analyzes how political connections influence the loan amounts secured by households for business purposes in both rural and urban settings. It further dissects the broader impact of political connections, revealing their nuanced effects in relation to the nature of loan and income sources. Consequently, this research offers valuable insights for policymakers and practitioners, suggesting strategies that provide fair financial opportunities to ensure a level playing field for all SBMEs. Plain English Summary Empirical research shows political ties lead to inequitable loan opportunities for Indian small businesses. This research investigates the impact of political connections on securing loans for small businesses and microenterprises (SBMEs) in India. It finds that businesses with such ties are more likely to secure larger loans, creating an uneven playing field. It highlights the challenges in the credit markets of developing countries and emphasizes the importance of distributing loans equitably. The study calls for policies that ensure equal financial access for all SBMEs, promoting a balanced approach to overcome the complexities of political influence in credit access. It advocates for a fair and inclusive economic environment, supporting equitable growth and opportunity for all SBMEs.