Regional Banking Intermediation and Economic Development in India: Cross-State Empirical Evidence

Abstract

Banking development is generally expected to promote economic development by mobilising savings, allocating credit and financing productive investment. However, India continues to exhibit substantial interstate differences in both banking activity and economic performance. This study empirically examines whether stronger regional banking intermediation is associated with higher economic development across Indian states. The credit-deposit (C/D) ratio of scheduled commercial banks is employed as the measure of banking intermediation, while per-capita Net State Domestic Product (NSDP) at constant 2011– 12 prices represents real economic development. The study conducts two complementary analyses. First, a cross-sectional analysis compares the end-March 2021 C/D ratios of 28 states with their 2021–22 real per-capita NSDP. Second, a decade-change analysis examines whether changes in C/D ratios between 2011 and 2021 are associated with real per-capita income growth among 26 comparable states. Descriptive statistics, Pearson and Spearman correlations, quartile comparisons and heteroskedasticity-robust ordinary least squares regressions are employed. Considerable interstate variation is observed in both banking intermediation and income. However, the cross-sectional relationship between the C/D ratio and real per-capita income is positive but statistically insignificant. Similarly, increases in C/D ratios over the decade do not significantly explain differences in real per-capita income growth. The findings indicate that credit intensity alone is insufficient to explain regional economic development. The developmental contribution of banking appears to depend on credit quality, sectoral allocation, infrastructure, financial inclusion and the ability of regional economies to transform finance into productive investment.