Macroeconomics of directed credit reforms in India

Vineet Kohli

International Review of Applied Economics, 2015, vol. 29, issue 4, 553-578

Abstract: This paper develops a theoretical framework to evaluate directed credit reforms in India. It formulates a post-Keynesian/structuralist macro model that incorporates key features of the Indian banking system. The model divides the economy into a demand constrained industrial sector and a credit constrained agricultural sector. The model shows that directed credit reforms tighten agricultural credit and output, erode real wages by increasing the agricultural price and reduce industrial demand. Inflation also picks up on account of real wage resistance. This paper, therefore, has a close affinity with existing accounts that warn against the stagflationary consequences of financial liberalisation.

Date: 2015
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DOI: 10.1080/02692171.2015.1016403

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