Bank Credit and Industrial Production in India: Granger Causality Test in VAR Framework

Abstract

There are many studies that have made efforts to establish relationship between finance and economic growth. There are studies that considered aggregate bank credit and economic growth as denoted by growth in GDP in a broader perspective. But studies that focused on finding the relationship between the quantum of bank credit and the extent of industrial production are rather limited. The present study is an attempt towards filling this gap by examining the relationship between bank credit and industrial production in India using time series data pertaining to 18 years, from 1991–1992 to 2008–2009. The study employs the Granger Causality Test in the Vector Auto Regressive (VAR) model to examine the direction of causality between bank credit deployment and industrial production. The results of the Granger Causality Test in the VAR framework adopting 2 lag lengths do not show significant causality in any direction between bank credit deployment and industrial production. The non-existence of causality implies that the proportion of bank credit in the overall capital structure of the industries is too small to cause any impact on industrial production pointing to the scope for bankers to play a greater role in financing the industrial sector. The main contribution of the study is that it has opened up avenues for further research on finding causality of relationship between various categories of financial systems and relevant components contributing to economic growth adopting the VAR framework.