Causality between Credit Deposit Ratio and Credit Share in Major Indian States during 1972 -2008

Abstract

The Indian economy has undergone different structural shifting in its history of development since 1947. One major break was the liberalization of the economy in the period 1991-92 and the reforms in the banking and financial sectors deserved a special attention in the study. The banking sector reform was done under the intention to make more investible banking funds for real investment to raise credit-deposit ratio along with proper allocation of banking funds to all the states so that share of credit of each state is balanced. Literature shows the falling tendency of credit-deposit ratio in the immediate decade after the reform and the rising tendency of divergence in credit possession among the states. At the same time, the states lacking in credit-deposit ratio are either with higher, lower, or moderate shares of credits. This study, hence, tried to examine the direction of causalities between credit-deposit ratio and credit share for the major 16 states of India. Using the time series econometrics technique, this study found 4 states where the causality works for the entire period and less than half of the state where causality works in either pre-reform or post-reform periods.