Balanced bank credits for balanced economic growth in India

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The study found that, there is a very close relationship between bank credit to a sector and contribution of that sector to GDP in the entire three sectors. The study also found that, there is an imbalanced growth in Indian economy over the years.

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Nội dung Text: Balanced bank credits for balanced economic growth in India

International Journal of Management (IJM) Volume 8, Issue 4, July– August 2017, pp.52–59, Article ID: IJM_08_04_007 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=4 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication BALANCED BANK CREDITS FOR BALANCED ECONOMIC GROWTH IN INDIA Sanjaya Jena Research Scholar, Department of Business Administration, Sambalpur University, Odisha, India ABSTRACT Indian economy is based on three pillars such as agriculture sector, manufacturing sector and service sector. For the balanced economic growth in India, all the said sectors should grow simultaneously. Any imbalance in the Growth among the three sectors create problem for the economy in the form of inflation, import etc. Secondly, bank credits to business and economic growth rate are positively correlated (Suna Korkmaz, 20151; Rashmi Umesh Arora 8). By considering the above two cases the present study has given an effort to find out the degree of association that exist between bank credits to a particular sector and contribution of that particular sector to GDP. So that, by controlling bank credit to a particular sector, policy makers can control the whole economy for a balanced economic growth. The study found that, there is a very close relationship between bank credit to a sector and contribution of that sector to GDP in the entire three sectors. The study also found that, there is an imbalanced growth in Indian economy over the years. Service sector is growing faster than manufacturing and agriculture sector. Agriculture sector is growing slowly as compare to the other two sectors. There is a need and big opportunity in the economy to accelerate primary and secondary sectors through bank credit accelerator to bring the three sectors in to a common hide which is being neglected over the years in Indian economy. The study afraid and guess that, this might be the reason of present agrarian distress, inflation etc. in India. So the study has suggested that, bank credit can be used as an instrument to manipulate the growth of a particular sector to keep the economic imbalances under control. Key words: Agricultural Sector, GDP, Manufacturing Sector, Service Sector. Cite this Article: Sanjaya Jena, Balanced Bank Credits For Balanced Economic Growth in India. International Journal of Management, 8 (4), 2017, pp. 52–59. http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=4 http://www.iaeme.com/IJM/index.as 52 editor@iaeme.com
Sanjaya Jena 1. INTRODUCTION To accelerate the pace of economic growth, Indian policy maker took economic reform in the year 1991. One of the major components of this reform is financial reform. After financial reform Indian financial sector experienced a wide range of changes, specifically Indian banking sector. Private Banks were allowed to enter in to the market. Scopes were provided to both private and public banks to adopt a liberal credit policy in providing loans and advances. The intention behind this might be to fulfil the shortage of funds to finance trade and commerce. The objectives of this liberal credit policy was to raise GDP growth rate of India through raising production of goods and services in different sector such as primary or agriculture sector, secondary or manufacturing sector and territory or service sector which are treated as three pillars of Indian economy (Ric Shand and S.Bhide2). The said three sector need to be grown at equal rate and their contribution to GDP should also be same. If a particular sector grows with a high rate as compare to other sectors then, it creates imbalances in the economy due to mismatch between supply and demand. The present study has concentrated on establishing the relationship of bank credits to a particular sector with the contribution of that particular sector to GDP and how much of funds need to be injected in a particular sector to maintain a balanced economic growth. 2. SIGNIFICANCE OF THE STUDY Assessment of the effectiveness of bank credit for the development of particular economic activities is necessary to prepare further strategic plans. The present study has tried to establish the relationship or association between loans and advances to different sector and the contribution of that sector to GDP. The study may be an information source for banks working in India and also for the policy makers to prepare strategic plans for sustainable and balanced economic growth. 3. OBJECTIVES OF THE STUDY • To know the degree of association between bank credits to a particular sector and contribution of that particular sector to GDP. • To analyze the changes of bank credits in different sectors over the years. • To predict the amount of funds need to be offer to the economy to have a balanced economic growth. 4. REVIEW OF LITERATURE Suna Korkmaz (2015)1 has undertaken a study named “Impact of bank credits on economic growth and inflation” to test the relationship between domestic credits & inflation and GDP in European Countries and found that, domestic credits has no impact on inflation but effect economic growth. Z. Yakubu and A. Y. Affoi (2014)3 in their study named “An analysis of commercial Banks’ credits on economic growth in Nigeria” reached in a conclusion that, bank credits has a significant impact on economic growth. The study has taken GDP as dependent variable and bank credit as independent variable. This result is further supported by a study conducted by Dr. B.C.Emecheta and R.C. Ibe (2014)4 named “Impact of bank credit on economic growth in Nigeria: Application of reduced vector Auto regressive (VAR)”. On a working paper, Neelam Timsina (2014)5 has examined the correlation between bank credits by banks in Nepal with the economic growth of Nepal and stated the existence of a strong relationship between the two variables. Fadi Hassan et.al.(2017)6 in a working paper found that, among the European countries, in Italy, the productive use of bank credits is less as compare to other countries such as France and Germany. Ujjal Bhuyan (2017)7 has conducted a study named “A study on the gross deployment of bank credits to various sector in the economy” and http://www.iaeme.com/IJM/index.as 53 editor@iaeme.com
Balanced Bank Credits For Balanced Economic Growth In India concluded that GDP, interest rate, commodity price and propensity to consume influence bank credits in India. Rashmi Umesh Arora (2009)8 in a study named “Bank credits and economic development: An empirical analysis of Indian states” proved that bank effort to use resources somewhere neglect the development need in the different states in India. Ric Shand and S.Bhide (2000)2 has given concluding remark on a study name “Sources of growth in the Indian economy before and with reform” that high GDP growth rate has achieved through the high growth rate in agriculture, industry and service sector. The study found very rare work on establishment of relationship between credit deployment to different sector and their effect on contribution to GDP which has provided scope to undertake the study. 5. RESEARCH METHODOLOGY The data involved under the study are secondary in nature. Data has been collected from official web site of RBI, IBA and NABARD. Data of 8 years from 2009-2016 has been used under the study. Linear Regression Model and Karl Pearson’s coefficient of correlation is used under the study. Bank credit is taken as independent variable and GDP is taken as dependent variable. GDP is taken at current price. The model used is: GDP = β1 + β2 Bank credit +u Where β1 = Intercept (GDP with no bank credit) β2 =slope coefficient (change in GDP with a unit change in Bank credit) u =Error term. (Effect of other factor on GDP) Including this, Line Graphs, Bar Diagrams are used to present the data diagrammatically. 6. DATA ANALYSIS AND FINDINGS Fig.1 shows the relationship between bank credit to agriculture & allied activities and the contribution of agriculture and allied activities to GDP of India. The movement of the two lines are in the same direction. The absolute value of bank credit has increased by 2.12 times from Rs. 4157.41 billion in the year 2009-10 to Rs.8829.42 billion in the year 2015-16. The contribution of this sector to GDP has also increased by 1.93 times from Rs.10835.14 billion to Rs.20930.81 billion for the same time periods. However the Average increase in bank credit to agriculture sector is 13 % and the average increase in contribution to GDP is 12 %. The degree of association between the two lines is 0.96 which clearly shows a positive correlation between the two variables. Agriculture sector 25000 20000 15000 GDP 10000 Bank Credit 5000 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Figure 1 Association between Bank Credits and contribution of Agriculture Sector to GDP. Source: Author, Amount in Billion Rupees http://www.iaeme.com/IJM/index.as 54 editor@iaeme.com
Sanjaya Jena Manufacturing Sector 30000 25000 20000 15000 GDP 10000 Bank Credit 5000 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Figure 2 Association between Bank Credits and Contribution of Manufacturing Sector to GDP. Source: Author, Amount in Billion Rupees. Fig. 2 clearly indicates a strong and close relationship between the credits to industrial sector and the contribution of industrial sector to GDP. Here the absolute values of bank credit have increased from Rs.13114.51 billion in 2009-10 to Rs.27306.77 billion in 2015-16 which is 2.08 times more. Contribution of this particular sector to GDP has also increased 2.2 times more from 2009-10 to 2015-16. The direction of the change is almost equal. The mean value of increase in bank credit to manufacturing sector is 13 % and of GDP contribution is 14 %. Here the correlation coefficient is 0.99 which indicate the presence of high degree of association between the two variables. Service Sector 80000 60000 40000 GDP 20000 Bank Credit 0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Figure 3 Association between Bank Credit and contribution of Service Sector to GDP, Source: Author, Amount in Billion Rupees. Fig.3 shows the data on service sector. In service sector, the growth in bank credit and contribution of service sector to GDP have increased by 2.12 and 1.97 times respectively from 2009-10 to 2015-16. The average increase in loan and advances to service sector is same 13 % and 11 % for contribution to GDP. Here also the movement of the two graphs are in same path and coefficient of correlation is 0.99 which explains a strong positive correlation between bank credit and contribution to GDP. http://www.iaeme.com/IJM/index.as 55 editor@iaeme.com
Balanced Bank Credits For Balanced Economic Growth In India Table 1. Bank Credit to different Sectors Year Agriculture Manufacturing Services 2009-10 4157.41 13114.51 7267.9 2010-11 4806.34 16045.76 8942.01 2011-12 5466.26 19373.25 10229.60 2012-13 5899.14 22301.79 11518.86 2013-14 6659.79 25164.83 13374.51 2014-15 7658.80 26576.27 14130.97 2015-16 8829.42 27306.77 15410.67 Source: RBI Database, Amount in Billion Rupees. 30000 25000 20000 15000 Agriculture and Allied Activities Industries 10000 Services 5000 0 Figure 4 Bank Credit to different Sectors, Source: Author, Amount in Billions Rupees. The above bar diagram shows the deployment of bank credit to different sectors. Over the years the credit to industry sector is comparatively more than agriculture and service sector. Credit to industry sector is 3.15 times more than the agriculture sector and 1.80 times more than service sector. The credit to service sector is 1.75 times more than agriculture sector. However the increase of credit to different sectors from 2009-10 to 2015-16 are almost same at a rate more than two times. Table 2 Contribution of different Sector to GDP Year Agriculture Manufacturing Services 2009-10 10835.14 11953.38 38300.51 2010-11 13196.86 13969.15 45322.59 2011-12 14990.98 15945.68 52980.25 2012-13 16807.97 20749.50 54542.76 2013-14 19024.52 22665.20 62118.42 2014-15 19952.51 24387.76 70383.83 2015-16 20930.81 26331.88 75531.40 http://www.iaeme.com/IJM/index.as 56 editor@iaeme.com
Sanjaya Jena 80000 70000 60000 50000 Agriculture and Allied Activities 40000 Industries 30000 Services 20000 10000 0 2009-102010-112011-122012-132013-142014-152015-16 Source: RBI Database, Amount in Billion Rupees. Figure 5 Contribution of different sector to GDP, Source: Author, Amount in Billion Rupees. The contribution of service sector in absolute amount is far ahead in comparison to industry and agriculture sector. It is 3.53 times and 3.20 times more than agriculture and industry sector respectively in the year 2009-10. Where as in the year 2015-16 it is 3.61 times and 2.87 times more. The contribution of agriculture sector is lowest. Manufacturing sector is next to agriculture sector. The diagram clearly shows the imbalances between the contributions of different sectors to GDP. Table 3 Corelation Coefficient between Bank Credits to different Sectors and their Contribution to GDP. Contribution to GDP Agriculture Manufacturing Service Agriculture 0.959 - - Bank Credit Manufacturing - 0.998 - Service - - 0.988 Table 4 Regression Analysis of Bank Credits to different Sectors and their Contribution to GDP. Scale Agriculture Industry Service Correlation 0.959 0.988 0.988 Goodness of Fit (R Square) 0.921 0.977 0.978 Adjusted R Square 0.906 0.971 0.973 Slope co efficient 2.19 1.00 4.47 http://www.iaeme.com/IJM/index.as 57 editor@iaeme.com
Balanced Bank Credits For Balanced Economic Growth In India Table 5. Other Statistics Scale Agriculture Industry Service Mean(Bank Credit) 6211.023 21411.88 11553.5 Mean % increase 13 13 13 Standard Deviation(Bank Credit) 1511.662 5044.018 2719.699 Mean(Contribution to GDP) 16534.11 19428.94 57025.68 Mean % increase 12 14 11 Standard Deviation(Contribution to GDP) 3449.437 5102.998 12287.99 Contribution/Credit Ratio 2.66 0.91 4.94 Allotment of credit Lowest Highest Average Contribution to GDP Lowest Average Highest Amount in Billion Rupees Table 6 Amount of Credits that had to be injected in to the Economy to have Parity in all Sectors. Bank Credit to Agriculture Sector Bank credit to Manufacturing Sector Year Actual For Parity Difference Actual For Parity Difference 2009-10 4157.41 16150.59 11993.18 13114.51 40277.89 27163.38 2010-11 4806.34 19357.30 14550.96 16045.76 47299.97 31254.21 2011-12 5466.26 22853.67 17387.41 19373.25 54957.63 35584.38 2012-13 5899.14 23567.15 17668.01 22301.79 56520.19 34218.4 2013-14 6659.79 27026.36 20366.57 25164.83 64095.80 38930.97 2014-15 7658.80 30800.52 23141.72 26576.27 72361.21 45784.94 2015-16 8829.42 33151.00 24321.58 27306.77 77508.78 50202.01 Amount of Credits that need to be injected in to the Economy to have Parity in all Sectors. (Expected) 2017-18 9977.24 41156.00 31178.76 30856.65 95039.61 64182.96 2018-19 11274.28 45830.31 34556.03 34868.01 105276.46 70408.45 2019-20 12739.93 51018.84 38278.91 39400.85 116639.36 77238.51 Amount in Billion Rupees 7. CONCLUSION AND SUGGESTION In one side Agriculture sector provide livelihood to more than 60 % of people in India, Farmers are under stress and committing suicide, Price of agricultural product is increasing day by day and Bank credit to agriculture sector is lowest as compare to other sectors. In other side the degree of association between bank credit to agriculture and its contribution to GDP is significant and Productivity of bank credit (GDP contribution/Bank Credit) is good enough. Somewhere, the above sentences of the two sides are not matching with each other. So the present study strongly concludes and suggests that there is a immediate need to make necessary arrangement to provide sufficient funds to agriculture sector to accelerate GDP growth. The contribution of service sector to GDP is highest as per the findings of the study and there is also a strong relationship between the bank credit to service sector and its contribution to GDP. Though the degree of association between bank credits and GDP contribution is very high but, the productive use of bank credit in manufacturing sector is lowest. Necessary arrangement need to be undertaken by giving more importance to this sector. Perhaps this findings match perfectly with the concept of Make in India and more amount of bank credits to different sector, specifically agriculture and manufacturing sector, may increase GDP of India very sharply. http://www.iaeme.com/IJM/index.as 58 editor@iaeme.com
Sanjaya Jena From 2009 to 2016 the bank credit has on an average increased to double which is quite encouraging. Effort should be given to continue the pace or to increase it. Agriculture and service sector are most consistence in receiving bank credit as compare to manufacturing sector where as agriculture and manufacturing sector are more consistence in contributing to GDP as compare to service sector. REFERENCES [1] Suna Korkmaz (2015); Impact of Bank Credits on Economic Growth and Inflation. Journal of Applied Finance and Banking. Vol.5, No.1, pp 57-69, ISSN-1792-6580, 1792- 6599(online), Science press ltd. [2] Ric Shand and S.Bhide (2000); Sources of Growth in the Indian Economy before and with Reform. Journal of South Asian Studies, 23:S1, 221-237, DOI: 10.1080/00856400008723410. [3] Z. Yakubu and A. Y. Affoi (2014); An analysis of commercial Banks’ credit on economic growth in Nigeria. Current Research Journal of Economic Theory. 6 (2), pp11-15, ISSN2042-4841, e-ISSN 2042-485X, Max well scientific Organisation. [4] Dr. B.C.Emecheta and R.C. Ibe (2014); Impact of Bank Credit on Economic Growth in Nigeria: Application of Reduced Vector Auto Regressive (VAR). European Journal of Accounting, Auditing and Finance Research, vol.2, No.9, pp11-21, Nov.2014. [5] Neelam Timsina (2014); Impact of Bank Credit on Economic Growth in Nepal. Nepal Rastra Bank, Working Papaer No.22, June 2014. [6] Fadi Hassan et.al. (2017); Bank Credit and Productivity Growth. Working Paper Series, No.008/Feb 2017, European Central Bank. [7] Ujjal Bhuyan (2017); A Study on the Gross Deployment of Bank Credit to Various Sector in the Economy. International Journal of Applied Research, (4), pp 308-312, ISSN 2394- 7500. [8] Rashmi Umesh Arora (2009); Bank Credit and Economic Development: An Empirical Analysis of Indian State. Journal of Asian Public Policy, 2:1, 85-104, DOI: 10.1080/17516230902734502. [9] Wendrila Biswas, Public Private Partnership and Economic Growth with special reference to India – An overview. International Journal of Management, 7(3), 2016, pp. 18-26. [10] Settapong Malisuwan, Noppadol Tiamnara and Dithdanai Milindavanij. The Impact of Spectrum Assignment on Economic Growth and Competitiveness in Thailand. International Journal of Management, 6(12), 2015, pp. 11-21. http://www.iaeme.com/IJM/index.as 59 editor@iaeme.com