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.