Long-run Association Between Bank Credit and Output: A Study on Districts’ Panel of West Bengal, India

Abstract

In a globalized world, the financial sectors and the real sectors are interlinked. Although it is a common phenomenon to a developed economy in its national as well as provincial levels, it has hardly been tested for the low-income countries like India. It is further difficult to have such linkage effects at the provinces and district levels. This article aims to examine whether per capita commercial bank credit and per capita net district domestic product for the districts of West Bengal state in India have long-run associations for the period 1993–2014 in a panel data framework. Using the panel cointegration and Vector error correction mechanism (VECM) technique, the study reveals that both the financial and real sector indicators are cointegrated and the short-run errors are corrected significantly to establish that there is bilateral causality between credit and output in both long run and short run.