Implications of Banking Sector on Economic Development in India

Banking sector provides several facilities in a country. Financial activities of banking sector are crucial drivers to increase the socio-economic development. Subsequently, economic development increase as increase in efficiency of banking sector in a nation. Existing researchers used different indicators of banking sector to examine their impact on economic growth in developed and developing economies. In India, limited studies could examine the impact of banking sector on economic development. Therefore, this study assesses the impact of banking sector on per capita gross domestic product (GDP) in India using a time series data during 1981-2019. It used per capita GDP as dependent variable, and broad money as a % of GDP, broad money to total reserves ratio, domestic credit to private sector as a % of GDP, final consumption expenditure as a % of GDP, annual consumer prices inflation, literacy rate and real interest rate as independent variables. It applied linear, log-linear and non-linear regression models to estimate the regression coefficient of aforesaid variables with per capita GDP. The empirical results claimed that broad money to total reserve ratio, domestic credit to private sector, final consumption expenditure and literacy rate have positive impact on per capita GDP. Consumer price inflation and real interest rate have negative impact on per capita GDP in India. India needs to control high inflation and real interest rate to increase the demand of goods and services to strengthen the economic development. The estimates of the study clearly indicate that financial activities of banking sector play a vital contribution to increase economic development in India