Banking Expansion and Income Growth in India

Mohd Anwar,Imlak Shaikh

doi:10.3390/su10082756

Abstract

In this article, we examine the impact of banking expansion on income growth in India. The banking expansion indices have been calculated across the region and states/Union Territories, providing the insight that all the regions, excluding the western region, are exhibiting banking expansion indices in the low range. The state-wise analysis indicates that all states exhibit a low-range index, excluding the state of Maharashtra and the UTs of Delhi and Chandigarh. Further, for the examination of the linkage between banking expansion and income growth, a panel data set was prepared for the 23 states/UTs over the period from 1990 to 2015. The panel data regression analysis approach was applied for the estimation of the regression model. It is apparent from the results that the banking expansion has significant and positive effects on credit disbursement. The results indicate that a one crore increase in deposit mobility causes 0.81 crores of increase in credit disbursement. Moreover, credit disbursement and deposit mobilization have a substantial and positive effect on the Net State Domestic Product. Moreover, a 1 percent increase in credit causes a 0.46 percent increase in NSDP, and a 1 percent increase in deposits causes a 0.57 percent increase in NSDP. Further, Net State Domestic Product has a significant and positive effect on the income of individuals. It is evident that a 1 percent increase in NSDP causes a 0.54 percent increase in per capita NSDP, while a 1 percent increase in capital expenditure causes a 0.13 percent increase in per capita NSDP.

Highlights

This study investigates the banking expansion across the 6 regions and 23 states/UTs of the country
This study was conducted with the aim of testing the hypothesis that the banking expansion has positive effect on the national income
For an understanding of the linkage between banking expansion and income growth, the hypothesis was further proposed at a disaggregated level, whereby an increase in deposit mobilization causes an increase in credit disbursement

Summary

Introduction

This study investigates the banking expansion across the 6 regions and 23 states/UTs of the country. The Credit to Deposit Ratio (CDR) was calculated to measure the flow of the credit as against the deposits across the regions These indices are calculated based on data sourced from the various publications of the Reserve Bank of India (RBI). The study further examines the linkage between the banking expansion and national income. For examining the linkage between the banking expansion and national income, a set of panel data were prepared with the 23 states/UTs as cross-section units, pooled over the period 1990 to 2015. To examine banking expansion and income growth in India, several hypotheses were formulated and tested in framework of the panel data. The state-wise analysis indicates that the Union Territories of Chandigarh and Delhi, belonging to the Northern region, showed a credit index and deposit index in the high range. The national income has a significant and positive effect on the income of individuals

Methods

Results

Conclusion