| Summary: | Using data from staggered state elections in India, I analyze the consequences of political interference in the banking sector on firm activity. In states with forthcoming elections, politicians influence banks to increase lending to farmers, which crowds out lending to manufacturing firms. Both the increase in agricultural lending and the decrease in manufacturing lending before elections are larger in locations where a higher proportion of voters are engaged in agriculture. Comparing firms in states that have an election in a given year against comparable firms in states that do not, I find reduced availability of bank credit forces firms to reduce production, cut investment and lay off workers. Additionally, new firms are less likely to start production during an election year. I explore alternative explanations and provide evidence that the results are more consistent with political interference. This interference is costly: reduced production during elections lowers plant utilization rates and renders some productive capacity idle.
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