Does Local Financial Development Matter for Growth? Evidence from Indian Districts

This chapter investigates finance–growth relationship at district level and attempts to provide policy implications relating to access to financial services, hence, growth in local economy. The districts with higher financial development also experience higher growth rate of per capita gross district domestic product and per capita gross district domestic product (GDDP) during 2004–05 to 2010–11. We found relatively stronger effect of deposit than credit on economic growth that highlights the critical role of branch access in unbanked locations in district economy. Our findings implicate the importance of bottom-up approach of decision-making in which local financial conditions are as significant as financial development at macro-level financial development in the process of growth. Economic reforms played a significant role to this effect through various policy instruments meant for local economy. Banks and financial institutions became instrumental to foster savings and hence investments by providing better financial access to local people. This, in turn, augmented economic growth in local economy. While analysing the role of financial development, we also find positive and significant effect of human capital on growth that may activate alternative channels of growth and production which are less finance-intensive.