Financing Indian growth : a case study of Sonepat District in Haryana

Abstract

The paper is based on UGC sponsored major research project recently completed. Major finding of the project has been that the Indian financial sector has failed to assist in the growth process of the economy. Granger causality tests on quarterly data in the framework of VAR and VEC models have been used to establish the results. These results hold at the aggregate economy level and also at the sectoral level. The reasons are to be found in the working of the financial system as experienced by the demand side of loanable funds. The field study conducted under the project has brought out that not only has the system failed to contribute to economic growth but also that its functioning is highly lopsided. Primary data collected through field survey points to a biased allocation of the available funds by the banking system and a substantial presence of the informal sources of credit in the economy. While the informal real sector is the one that primarily contributes to the growth of the Indian economy the dismal reality is that its financial needs are barely served by the mainstream financial sector. This in itself explains the failure of the financial system to contribute to economic growth. Since the finance growth linkages are found to be weak/ absent, an important implication of the result is that controlling inflation in India using tight credit policies can be achieved with minimum costs to growth of the real sector.