Shattered Connections: Insights into Indian Corporate Performance in the Wake of Geoeconomic Fragmentation

The global economy is nearing fragmentation, which raises concerns about macrofinancial volatility, risks, and inefficiencies. This paper examines the effects of geoeconomic fragmentation on the financial performance of the Indian corporate sector. We analyse data from 55,104 Indian companies to assess how the global geopolitical risk index and the total number of sanctions impact corporate vulnerability, measured by the Altman Emerging Market Z-score, from 1990 to 2023. We use two-way Fixed Effects, Fully Modified OLS, Panel Dynamic OLS, and local projections to explore these relationships. Our findings show that higher fragmentation is linked to increased financial distress across all specifications. Cumulative impulse response functions indicate that financial distress peaks between years 7 and 10 after shocks from geopolitical risks and sanctions, with persistent vulnerabilities in the long term and sporadic recoveries. We also find that construction and services firms are most affected by geopolitical risks, while no statistically significant relationship could be established for financial, electricity, and mining firms. Analysing based on ownership structures, we conclude that joint firms experience the greatest negative impacts; however, government and foreign-private firms show no significant effects. Additionally, trade sanctions are found to be more impactful than financial sanctions. JEL Codes: F36, F50, F51, G32