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Financial Sector and Economic Growth in India

Author

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  • Ms. Margaux MacDonald
  • Ms. TengTeng Xu

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.

Suggested Citation

  • Ms. Margaux MacDonald & Ms. TengTeng Xu, 2022. "Financial Sector and Economic Growth in India," IMF Working Papers 2022/137, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2022/137
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