Role of banking credit in sectoral growth and interlinkage in India: post-nationalisation era

Present study examines the post-nationalisation impact of financial intermediation and public investment on sectoral output and inter-sectoral linkage of the Indian economy. By doing so, it attempts to establish the channels through which financial intermediation operates in impacting the real sector growth at an aggregate level. Applying the usual time-series techniques of unit root tests and structural vector autoregression (structural VAR) methodology, we observe that in case of India, growth of banking finance in the form of sectoral credit allocation provides a positive impact on real growth of that sector and others. This could be viewed as a channel through which the ‘finance-growth’ nexus materialises itself at an aggregate level of the economy. The transmission initially begins as credit allocation to different sectors which, in due course, increases their level of output and gets aggregated into the final output of the economy. Besides, our impulse responses observe that there is ‘less-than desired’ impact of banking credit allocation for industrial sector which is in accordance with the reality as well. However, the impact of banking credit on real growth in agriculture and a sub-sector of service (trade and transport) is positive.