Financial development and the environmental performance of manufacturing firms: Evidence from India

This study examines how financial development affects the environmental performance of manufacturing firms. Exploiting state-level variation in the credit-to-GDP ratio and detailed energy consumption data from Indian manufacturing firms during the 1990s and 2000s, I find that financial development significantly reduces firm energy intensity. To explore the potential channels, I combine highly disaggregated product-level production and energy consumption data. The results show that financial development lowers energy intensity through technological upgrading, the use of less carbon-intensive energy, and a reallocation of production toward cleaner products. The findings highlight the important role of financial sector development in improving the environmental performance of manufacturing firms and promoting sustainable industrial development.