Role of Long-term Bank Credit in the Economic Growth of India

Abstract

The impact of overall bank credit on the economic growth is extensively studied by way of cross-country analysis. This article is a country-specific study on the role of long-term bank credit, rather than total bank credit, on the economic growth of India, using autoregressive distributed lag (ARDL) model with control variables. Further, this article examines sector-specific impact of long-term industrial credit on the industrial output. The results support the existence of long-run relationship between industrial long-term credit and industrial output in India. Furthermore, there is both long-run and short-run equilibrium relationship between total long-term bank credit and overall economic growth as evident from the statistically significant positive coefficient of long-term bank credit. In addition, Granger causality test shows that long-term bank credit Granger causes gross domestic product (GDP) growth. The outcome of this study highlights the importance of long-term bank credit for the economic growth of India. It also suggests that the government and the Central Bank of India should evaluate suitable policies for encouraging long-term credit.