The Role of Bank Credit as a Determinant of Economic Growth in India

The dynamics of the growth process in any country are varied and diverse. The factors that cause growth, and the processes behind growth itself, have been a very important subject in macroeconomic theory, as well as business studies. Theory has managed to identify certain key factors, of which finance is very important. In recent years, there have been studies using econometric time-series analysis to study the short-run and long-run relationships between finance and growth, for various countries. This paper studies the Indian economy to determine the causal relationship between bank credit and economic growth, using data from 1972 to 2012. The results suggest that provision of bank credit leads to economic growth. However, an increase in economic growth may not lead to further provision of bank credit in the economy. In other words, there is unidirectional causality from bank credit to growth.