Analytics of Credit-Output Behaviour for Indian States

Enduring growth in an emerging economy such as India’s invariably requires that the economy be set on a trajectory of higher savings and also ensuring that the savings realized are channelled into productive investment. In this scheme of growth, the banking system has a dual role to play: it acts as a mobilizer of savings as well as being an allocator of credit for production and investment. Prior to the economic reforms of the early 1990s, banks were fulfilling this mandate under the direct control of the government. The motivation for state control of banking activities can be appreciated if one traverses the broad agenda of economic policy-making since Independence. Under the broad rubric of growth, balanced regional development has been one of the avowed objectives of economic policy in India since the early days of planning. To pave the way for a more balanced pattern of development and to meet socially desirable objectives as set out in the Five-Year Plans, it was necessary to ensure that availability of credit did not act as a constraint on growth. Further, there was a need to augment the savings of the economy to attain higher growth rates. This was attempted through mobilization of savings by widening the reach of the banking system throughout the country. In this context, the nationalization of banks in the late 1960s was a major landmark.