IMF Working Papers

Financial Sector and Economic Growth in India

By Margaux MacDonald, TengTeng Xu

July 8, 2022

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Margaux MacDonald, and TengTeng Xu. Financial Sector and Economic Growth in India, (USA: International Monetary Fund, 2022) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

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.

Subject: Bank credit, Credit, Debt financing, External debt, Financial institutions, Financial statements, Money, Public financial management (PFM), State-owned banks

Keywords: Bank assets, Bank capitalization, Bank credit, Bank equity, Credit, Credit and Leverage, Credit growth, Cyclical financial conditions, Debt financing, Economic growth in India, Financial statements, GDP gap, Global, Growth from bank, Growth-at-Risk, India, Macro-financial Linkages, NPL ratio, Panel Regressions., State-owned banks

Publication Details

  • Pages:

    30

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2022/137

  • Stock No:

    WPIEA2022137

  • ISBN:

    9798400216404

  • ISSN:

    1018-5941

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