Political Connections During A Crisis

Using detailed data on firm operations along with a novel method of measuring political connections, we study whether and how political connections matter for firms during an economic downturn. In the context of India’s Demonetization episode of 2016, we use a synthetic difference-in-differences framework and find that firms with political connections are relatively more likely to get access to short-term credit, especially from banks, and can delay their short-term interest and debt payments owed to suppliers and creditors. They are therefore able to invest in productive assets, resulting in 8-10% higher income, sales, expenses, as well as substantial TFP gains that are persistent for over a three year period following the crisis. Put together, our results highlight the central role that political connections can play in providing access to scarce resources during a crisis