Financial Sector and Economic Growth in India

Margaux MacDonald and TengTeng Xu

No 2022/137, IMF Working Papers from International Monetary Fund

Abstract: India’s financial sector has faced many challenges in recent decades, with a large, negative, and persistent credit to GDP gap since 2012. We examine how cyclical financial conditions affect GDP growth using a growth-at-risk (GaR) approach and analyze the link between bank balance sheets, credit growth, and long-term growth using bank-level panel regressions for both public and private banks. We find that on a cyclical basis, a negative shock to credit or a rise in macro vulnerability all shift the distribution of growth to the left, with lower expected growth and higher negative tail risks; over the long term, the results indicate that higher credit growth, arising from better capitalized banks with lower NPLs, is associated with higher GDP growth.

Keywords: India; Credit and Leverage; Macro-financial Linkages; Growth-at-Risk; Panel Regressions.; credit growth; cyclical financial conditions; economic growth in India; GDP gap; bank capitalization; Credit; Bank credit; State-owned banks; Debt financing; Financial statements; Global; NPL ratio; bank equity; bank assets; growth from bank (search for similar items in EconPapers)
Pages: 30
Date: 2022-07-08
New Economics Papers: this item is included in nep-ban and nep-fdg
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