Convergence in Bank Credit: A Study of the Major Indian States over the Period 1972-2010

Convergence in Bank Credit: A Study of the Major Indian States over the Period 1972-2010

Ramesh Chandra Das (Vidyasagar University, India) and Soumyananda Dinda (Sidho-Kanho-Birsha University, India)
Copyright: © 2014 |Pages: 20
DOI: 10.4018/978-1-4666-4635-3.ch007
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The Indian economy witnessed a major structural break in the name of economic liberalization in the early nineties to free the economy from its long-standing controlled structure to achieve high growth rate of the overall economy and solve the persistent low growth and development problem. The existing literature reveals the phenomenal rise in income growth as well as rising divergence across states and regions under several grounds. The present study explores how divergences in allocation of commercial bank credit over time may result in the growing disparities in growth of incomes in the states of India. The study observes that there are diverging tendencies among the states during the post-reform period with respect to per-capita credit and aggregate credit. The study also reveals that the agriculture and industrial sectors are converging during the pre-reform phase, but there are insignificant signs of divergences in the industrial and service sectors during the post-reform period.
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Barro and Sala-i-Martin (1992) have explained the concepts of Beta (β) and Sigma (δ) convergence. By the term β convergence they indicated that the countries with lower per capita income or capital stocks will grow at a faster rate than the countries with higher per capita income or capital stocks and ultimately the poor countries will catch up with the rich ones. That ultimate state of the economy is called the steady state or long run equilibrium. This particular type of β convergence is known as Absolute β convergence. The underlying logic behind the arrival to such single long run equilibrium is that the rich countries with higher stock of capital per capita faces diminishing marginal returns to capital compared to the poor countries with low stock of capital. Another assumption behind Absolute β convergence is that the countries are similar in other parameters like population growth, savings rates, depreciation rates, level of government spending on creation of social infrastructures etc but they differ with regard to the initial capital stocks.

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