Authors : Shweta Yadav; Sachin Awasthi

Volume/Issue : Volume 11 - 2026, Issue 8 - August

Google Scholar : https://tinyurl.com/yueb8s29

DOI : https://doi.org/10.38124/ijisrt/26aug1003

Note : A published paper may take 4-5 working days from the publication date to appear in PlumX Metrics, Semantic Scholar, and ResearchGate.

Abstract : The expansion of banking is generally expected to support economic development by mobilising savings, improving credit allocation and financing productive investment. However, an increase in bank credit does not necessarily translate automatically into higher economic growth. This paper examines the relationship between banking industry development and economic growth in India during the post-liberalisation period. Annual data for 1991–2020 are used, with real GDP growth representing economic performance and domestic credit to the private sector by banks as a percentage of GDP representing banking development. Gross capital formation and inflation are incorporated as macroeconomic controls. Because credit and investment ratios display persistent trends, their annual changes are used in the principal regression. Heteroskedasticity-robust ordinary least squares, diagnostic tests and Granger-causality tests are employed. The findings show that annual changes in bank-credit depth do not have a statistically significant direct effect on GDP growth. Changes in gross capital formation, however, show a positive and significant relationship with growth. Granger-causality tests further indicate that GDP growth predicts subsequent changes in bank-credit depth, whereas changes in bank credit do not predict GDP growth. The results therefore provide greater support for a demand-following interpretation of financial development in India. The paper concludes that banking remains important for development, but its contribution depends on credit quality, productive allocation and the conversion of financial resources into investment rather than on credit expansion alone.

Keywords : Banking Development, Economic Growth, Bank Credit, Financial Development, Capital Formation, India.

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