The Role of Banking Sector in the Economic Growth of India Comparative Study With China

7/27/2019 The Role of Banking Sector in the Economic Growth of India Comparative Study With China.

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The Role of Banking Sector in the economic growth of India,

comparative study with china.

Sharad, Ganjihal

This dissertation is submitted in partial fulfilment of the requirements of

Staffordshire University for the award of MBA(Finance)

May 2009


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ACKNOWLEDGEMENTS

This research work is one of the infinite blessings of GOD to me as I made material

contribution towards deep oceans of knowledge already existing.

My foremost appreciation and deep gratitude goes to my very kind and generous

supervisor, Alison j Maguire and post graduate director Dr. Carole-Eve Williams for their

consistent support, encouragement, guidance and sympathy throughout the dissertation

work as I was facing the toughest challenge in my life.

I would like to take this opportunity to thank all my friends, colleagues who provided me

valuable help, confidence and encouragement throughout my research work.

Finally my heartfelt thanks to my beloved parents and family members for their sincere

prayers, support and encouragement throughout my career.


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ABSTRACT

Purpose: The main purpose of this research is to explore the impact of banking sector on

the financial development and economic growth of India with perceptive of Chinas

financial sector and economic growth rate.

Design/Methodology/Approach: The relationship between both the markets is analysed

by using Pearson product moment correlation coefficient approach on the Gross

domestic product, domestic savings, interest rate of India and China. Furthermore, after

getting the value of correlation coefficient r, T-test is applied to get the conclusion for

accepting or rejecting the hypothesis.

Findings: It is evident that correlation between Gross Domestic Product, M3 and Market

capitalisation is very strong and positive on the other hand there exists a weak and

negative correlation between Domestic credit provided by the banking sector, Gross

Domestic Product and Inflation.

Research limitations/implications: It may be observed that regression coefficientcorrelation in OLS model test was not used due to time constraint and also applying T-

test was limited as only 10 variables were observed to arrive at conclusion.


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GLOSSARY

ABC : Agricultural Bank of China

BOC : Bank of China

CCB : China Construction Bank

CDRD : Domestic Credit Provided by the Banking Sector

CRR : Cash Reserve Ratio

EG : Economic Growth

FD : Financial Development

FDI : Foreign Direct Investment

GDP : Gross Domestic Product

GDS : Gross Domestic Savings

ICBC : Industrial & Commercial Bank of China

IMF : International Monetary Fund

INF : Inflation

M3 : Money Supply

MCAP : Market Capitalization

NBFI : Non Banking Financial InstitutionPPP : Purchasing Power Parity

PSB : Public Sector Bank

RBI : Reserve bank of India

ROI : Rate of Interest

SLR : Statutory Liquidity Ratio

WTO : World Trade Organisation


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Chapter 1..............................................................................................................................7EXECUTIVE SUMMARY & INTRODUCTION..............................................................7

1.1 Introduction................................................................................................................71.2 Aims & Objectives.....................................................................................................91.3 Dissertation Outline.................................................................................................10

1.4 Synopsis ..................................................................................................................11Chapter 2............................................................................................................................12LITERATURE REVIEW..................................................................................................12

2.1 Introduction..............................................................................................................12Diagram 2.1.1: Harrold-Domar role of savings & investment growth......................13

2.2 Theoretical Background ..........................................................................................14Table 2.2.1: Financial structure and economic growth..............................................15

2.3 The Financial system and Economic growth...........................................................152.3.1 Role of Financial System..................................................................................15Diagram: 2.3.1.1: Growth Cycle................................................................................16

2.4 Financial development and Economic growth in China..........................................17

2.4.1 Household Savings in China.............................................................................172.4.2 Banking Sector in China...................................................................................182.5 Economic growth in India........................................................................................19

2.5.1 The Financial System in India..........................................................................202.5.2 The Financial Market:.......................................................................................202.5.3 The Financial Intermediaries:...........................................................................21Table 2.5.3.1: Financial intermediaries and its role in different financial markets...212.5.4 The Financial development in India.................................................................212.5.5 The Banking Sector in India.............................................................................222.5.6 Liberalization Policy.........................................................................................24

2.6 India Vs China.........................................................................................................25Chapter 3............................................................................................................................27RESEARCH METHODOLOGY.......................................................................................27

3.1 Introduction..............................................................................................................273.2 Forms of Research Methodologies..........................................................................283.3 Research Strategy and Design.................................................................................293.4 Data Collection methods and Analysis....................................................................30

3.4.1 Objective 1: ......................................................................................................303.4.2 Objective 2: ......................................................................................................313.4.3 Objective 3: ......................................................................................................313.4.4 Objective 4: ......................................................................................................32

3.5 Advantages of Secondary Data:...............................................................................323.6 Limitations...............................................................................................................323.7 Ethics Disclaimer:....................................................................................................333.8 Synopsis:..................................................................................................................33

Chapter 4............................................................................................................................34RESEARCH FINDINGS AND DISCUSSION.................................................................34

4.1 Introduction..............................................................................................................344.2 Gross Deposit Product Growth (annual Percentage)...............................................344.3 Liquid Liabilities (M3) as Percentage of GDP........................................................34


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4.4 Domestic credit facilitated by the Banking sector (Percentage of GDP).................354.5 Market capitalization of listed companies (Percentage of GDP).............................354.6 SPSS results with absolute values & application of T-test .....................................35

Figure 1: Trends in GDP and M3 (Money Supply) in India.............................................36Table 1: The Regression result of GDP and M3 of India................................................36

Figure 2: Trends in DCRD, Inflation & GDP in India......................................................38Table 2: The Regression results of DCRD & GDP of India..............................................38Figure 3: Trends in Inflation and GDP in India.................................................................39Table 3: The Regression results of Inflation & GDP of India...........................................40Figure 4: Trends in Inflation & GDP in China..................................................................41Figure 5: Trends in Market Capitalization and GDP in India............................................42Table 4: The regression results of MCAP & GDP of India...............................................42Table 5: The Regression results of India GDP & China GDP...........................................43Figure 6: Trends in Gross Domestic Savings (percent of GDP), Rate of Interest and GDPin India...............................................................................................................................45Table 6: The Regression results of rate of Interest (ROI) and Gross Domestic Savings

(percent of GDP) of India..................................................................................................46Table 7: The Regression results of Gross Domestic Savings (percent of GDP) and GDPof India...............................................................................................................................47Figure 7: Trends in Gross Domestic Savings (percent of GDP), Rate of Interest and GDPin China..............................................................................................................................48Table 8: The Regression results of Rate of Interest (ROI) and Gross Domestic Savings(percent of GDP) of China.................................................................................................48Table 9: The regression results of Gross Domestic Savings (percent of GDP) and GDP ofChina..................................................................................................................................50Table 10 Financial Development my Income group, worldwide, 1990s (assetscapitalization as percentage of GDP).................................................................................50Synopsis:............................................................................................................................51Chapter 6............................................................................................................................51REFLECTIONS ON LEARNING.....................................................................................51Chapter 7............................................................................................................................54References:.........................................................................................................................54Chapter 8............................................................................................................................59APPENDIX........................................................................................................................59

Diagram 1: The Financial System..................................................................................59Diagram 2: The Financial System and its Components.................................................59Table 1: Comparison of macroeconomic variables in the real sector: Average for 1991 2004.............................................................................................................................60Table 2: Comparison of the banking and financial sector (Averaging for 1991 2004)........................................................................................................................................61


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Chapter 1

EXECUTIVE SUMMARY & INTRODUCTION

1.1 Introduction

It has been long debated in the economic literature that the financial sector played an

important role in the economic growth. The results of some modern empirical literature

emphasised that well-functioning financial structure played a vital role in economic

growth. Many economists have widely explored the relationship between finance andgrowth and established that financial development has a strong, positive influence on

economic growth.

This research provides a selective summary of the available literature on the impact of the

Banking sector on the growth of Indian economy. In addition to this, the study presents a

selective synopsis on financial development and economic growth of India in perspective

with China and to understand how the banking sector occupied a vital role in the

promotion of economic growth and also conducted a comparative study on the

similarities of both the economies.

.

Long-term sustainable economic growth depends on the ability to raise the rates of

accumulation of physical and human capital, to use the resulting productive assets more

efficiently and to ensure the access of the whole population to these assets. Financial

intermediation supports this investment process by mobilising household and foreign

savings for investment by firms; ensuring that these funds are allocated to the most

productive use; and spreading risk and providing liquidity so that firms can operate the

new capacity efficiently.


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During the period of Industrial Revolution in the mid 1800s, the financial system in

England thrived in identifying and granting profitable projects. This allowed England to

achieve the highest comparative superior economic growth. The economist Walter

Bagehot said in 1873 In England, However ,.capital runs as surely and instantly

where it is most wanted, and where there is most to be made of it, as water runs to find

its level ( Willem, F.D , 2001).

The economist Fitzgerald (2006) in his research believed that continual economic growth

of any economy in the long run depends on the capacity to ascend the rate of

accumulation of human capital in the expansion of the firm or to place in the productive

assets. Financial intermediation sustains this investment practice by organizing household

and foreign savings for investment (FDI) by various firms; to be assured that these

finances are distributed to the most productive use. Historically financial intermediaries

such as banking and non-banking institutions played an important role in the investment

process by accumulating the funds from household and foreign savings, to make sure that

the investment was put in the proper productive use.

Its a controversial issue about the relationship between the financial development and

economic growth. On the whole, the debate has been balanced whether the financial

development drives the economic growth and vice versa. The puzzle is becoming more

and more complicated and dynamic in nature about the relationship between the financial

development and economic growth.

Recently many economists argued that in emerging economies the stock market has the

higher impact on the economic development rather than the Banking institutions (Levine

and Zervos, 1996). The main objective of my study is to re-examine the puzzle of role of

the banking system on the financial development and economic growth.

King and Levine (1993) supported the argument that the financial intermediaries

facilitate the mobilizing savings, evaluating projects, managing risk, monitoring

managers and facilitating transactions and these are all required for the technological


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innovation and economic development. In this research we study that the progress in

banking sector and financial expansion are positively linked with economic growth using

statistical data for China over the period 1980 - 2000. In particularly we examined that

the banking sector and the financial growth are extensively related with the present and

future rates of economic growth and capital accumulation.

India has achieved tremendous growth in the economy since 1980 till 2000. India being

the 12th largest economy in the world by market exchange rate and the 4 th largest

economy in the world GDP measured by purchasing power parity (PPP) details clearly

mentioned in the World Development Indicators (Anon., 2007). During 1980-1990 the

average economic growth was 5.9 percent and it had gone up to 6.2% by 1990 2000

GDP growth (Delong, 2001) and the per-capital income steadily growing at 6 percent by

2000.

Since Independence, Indian economy has successfully experienced nationalization at

different times. In 1990s, the privatization and liberalization has been started to promote

the efficiency of the financial system, during this period Indian economy has performed

very well because of the best performance of the Banking sector in India.

1.2 Aims & Objectives

This research has been conducted with some aims and objectives based on the past

empirical evidences and literature review of the financial development and economic

growth.

The main aim of this study is to examine the influence of the development ofBanking sector on Indian Economy

In this process, one of the objective of the research is to find out the link between

the financial development and Economic growth in India

In addition to this, to find out the impact of Banking and Non-Banking financial

institutions on the Indian financial development and Economic growth


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Also to analyze the role of Banking sector in comparison with the other financial

intermediaries on the economic growth of India

Besides this, to conduct a comparative study on the role of banking sector on the

financial development and economic growth of India in context with China

Furthermore, to investigate in detail about the relationship between the Economic

growth, financial development and Banking sector in China

Finally to understand the similarities of both the economies that is (India Vs

China) in relation with Economic growth, Financial development and Banking

sector.

The primary objective of this research is to formally establish the role of banking sector

on the economic growth of India in correlation with China. In addition, in terms of its

objectives, this research analyze the impact of Banking sector reform which was an

essential part of the liberalization process of the economy in the late 1980s in India and

to estimate the rate of influence of the Banking sector on the economic growth when

compared with the other financial intermediaries. This research also aimed at a

comparative study of well developed nation China with the same political and financial

situation.

1.3 Dissertation Outline

The research on this topic proceeds as follows Chapter 2 cover a brief literature review

with emphasis on economic theories and empirical work undertaken on the role of the

Banking sector on the financial development and economic growth of India and China.

Chapter 3 covers the research methodology in general and also presents the methodology

adopted in this research and also highlight the study on the data resources and its

limitations. Chapter 4 presents the various trends in the financial sector and economic

growth of India in context with China and also provides the empirical results by utilising

SPSS regression and interpretation of these results. Chapter 5 finally narrates some

conclusions and suggestions for further research.


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1.4 Synopsis

After the brief introduction on the research topic stating the aims and objectives the study

may be proceed further to Chapter 2 which covers literature review with emphasis on

Growth models such as Harrod-Domar, Neo-classical and Endogenous growth models,

theoretical and empirical evidences suggesting the well based financial system that

promotes economic growth, a detailed description of the role of financial development

and economic growth of India and China and the impact of banking sector on the

economic growth of both the economies and a comparative study of the similarities and

salient features of India and China.


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Chapter 2

LITERATURE REVIEW

2.1 Introduction

The concept of encouraging economic growth is not new. Many economists introduced

significant theories of economic growth. Even though the function of the financial system

in the process of development has been well accepted, however the relationship between

the economic growth and financial development is still the point of continuing debate

among economists.

At different times many economists have extensively investigated the relationship

between finance and growth and found that financial development has a strong, positive

impact on economic growth. The economist (Lewis, 1970 p.214) believed that savings

are necessary to economic growth. The growth models also prove that economic

development can be increased by capital accumulation which can be achieved by a boost

in savings. This concept can be supported by an illustration of Harrod-Domar Model

developed in 1930s diagram 2.1.1 which states that an economy can grow faster if

savings rate are increased. In contrast to this the neo-classical model of growth believes

that a raise in capital investment increases the growth rate temporarily because the share

of capital to the labour increases, in the long-run growth path, with real GDP will at the

same rate.


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Diagram 2.1.1: Harrold-Domar role of savings & investment growth

Source: Harrold Domar model 1930s,Economic Growth

Economic growth will be stable when capital, labour and output are all steadily growing

at the similar rate hence capital per worker and output per worker are invariable.

Therefore Neo-classical economists firmly believe that by a raise in the labour supply and

by enhancing the productivity of labour and capital this will result in achieving long term

trend rate of growth in an economy.

Neo-classical theory economists Henry (2007) argue that the rate of capital accumulation

may be increased by liberalization of national market which will create additional

domestic and foreign investment and thus by raising domestic saving rates which enhance

per capita income and capital labour ratio in capital-poor developing countries.

According to the Endogenous growth model, economists deem that productivity

development can be related to rapid innovation and raise in human capital investment.

According to Thirlwall, the good financial system will certainly encourage savings, so

that the financial institutions will allocate savings in better productive way. The large andefficient financial markets help economic agents hedge, trade and pool risk, raising

investment and economic growth (Rioja and Valev, 2004).

In macro level the financial system refers to different group of institutions, public and

private individuals which help the household savings from societies into productive


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investment. The role of the financial system in the growth of economy has been an on-

going debate in economic literature, research findings demonstrate that efficient financial

markets improve the quality of investments & enhance economic growth. Financial

markets may also promote growth by increasing the proportion of resources allocated to

firms. Endogenous growth theory argues that a higher savings rate leads to higher

economic growth (Sinha, 2001).

2.2 Theoretical Background

Both theoretical and empirical evidence suggest that the well based financial system

promotes economic growth. Most of the theoretical models suggest that there are three

different ways by which a financial system influences the acceleration of economic

growth under the basis of endogenous growth model (Amar, n.d.).

It can increase the productivity of investment

An efficient financial sector reduces transaction cost & thus increase the share of

savings channelled into productive investment

Financial sector development can either promote or reduce savings

Philip Arestis University of Cambridge in 2005 found considerably long-run positive

relationship between the financial development and economic growth, where as in the

short-run this relationship can be negative in few countries. Exactly to opposite of this

argued by (Fabris, 2008) the liquid and proficient financial intermediaries are the key for

growth, apart form equity markets or banks.

This research will critically evaluate the relationship between financial system and

economic growth. The same may be viewed from four different angles to judge the

financial structure and economic growth.


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Table 2.2.1: Financial structure and economic growth

View of Financial structure and growth View of Suggestion

The intermediary-based view Financial market & intermediaries are substitute

source of financial servicesThe market-based view

The financial services view Financial-market & intermediaries are

compliments in the provision of financial servicesThe law and finance view

Source: This table was adapted from Financial Structure and economic growth: A Non-

Technical Survey by Veronika Dolar and Cesaire Meh.

2.3 The Financial system and Economic growth

The financial system of a country greatly influences its economy. The close relationship

between financial structure and economic development is reflected in the prevailing

institutional arrangement and intermediation process. The main function of the financial

structure especially the banking system is to gather funds from the people who has more

savings and lend the amount in bulk to people who have productive investment

opportunities. The Financial system will progress both quality and quantity of actual

investment, this will lead to better per capital income and better standard of living.

(Levine, 1997) he argued in this literature that a review in the financial development will

definitely have a positive impact on economic growth.

Authors including Franklin Allen and Hiroko Oura (2004) emphasized that the financial

system played a critical role in igniting industrialization in England by facilitating the

mobilization of capital.

2.3.1 Role of Financial System

Financial system will help in the mobilization of household savings to corporate sector

and distribute capital to different firms. This will help in sharing the risk by household

savings and firms. This intermediation is the root cause for the link between financial


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development and financial constitution on economic growth. Grahame Thompson( 1998,

p.83) defined financial development as the process meant the gradual evolution, in the

course of economic development, of financial institutions money, banks and other

financial intermediaries, and organised securities markets. Many economists pointed out

that in developing countries financial liberalization indeed leads to financial frailty and

incidents of crises; however financial liberalisation also has led to higher GDP growth. A

large empirical literature has proved that in practice financial systems are important for

growth.

Diagram: 2.3.1.1: Growth Cycle

Better Financial Institutions

High Savings Rapid Economic Growth

Better Capital Investment

Source: Theory of Economic Growth. 9th ed. London: Novello.

Franklin Allen and Hiroko Oura (2004) in his research discussed about few models where

financial intermediaries arise to produce information, to generate information and trade to

the different investors. In his model he defined that financial intermediaries produce

better information, develop resource allocation and promote growth. Hagemann and

Seiter (2003, p.55) discussed about a research model in which the financial institution


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will generate the best information by properly allocating the resources i.e. funding the

firm with the finest technology for the robust economic growth.

2.4 Financial development and Economic growth in China

Financial constitution in China has been undergoing remarkable changes. Before the

process of the financial sector reform has started in China, Allen, et al., (2008) in their

recent research found Peoples Bank of China was the only financial institution in the

nation; it guarded 93% of Chinas financial assets. In 1978 China had implemented

reform and opening-up policy and has accommodated the Banking institutions which

played a vital role in its subsequent development. Therefore the financial structure in

China is predominately conquered by the Banking industry.

Chow (1994, p.79) in his writings asserted that the latent dynamism of [Chinas]

productive sectors will enable the economy to continue growing during the 1990s at rates

that would be considered very respectable in most countries. There is a rapid economic

growth in China since 1980 till 2000. During this period, the GDP climbed consistently at

annual average of 9.8 percent. The GDP per capital increased from $300 in 1984 to

$1300 in 2004 and GDP measured in PPP (Purchasing Power Parity) jumped from 4

percent in 1984 to 13 percent in 2004 Rosen (2005).

2.4.1 Household Savings in China

The Household savings contributions were extremely significant to gain huge capital

investments. An estimation of 30 to 35 percent of their total earnings parked into

government banks towards savings at a lower interest rate. The primary reason for higher

savings was the lack of social security or public pension schemes.

Moreover the government of China was able to finance the top companies in the private

sector due to the increase in the domestic savings rate. The important factor behind this


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was the continual raise of the interest rate of household savings in the banking system. As

the contribution of household savings had increased, the percentage of GDP had gone up

from 20percent in 1978 to 22percent in 1994. Trumpbour (2007) in his recent research

paper discussed that

Chinas central bank had preferred to park several hundred billions dollars in safe

custody at low interest yielding treasury bills, thus contributing to the stability of the US

economy and to allow the consumers to keep on spending money. Meanwhile, the low,

sub-optimal interest rates paid out by Chinas banks reduce upward pressure for the

appreciation of the Yuan.

Bank loans accounted for more than 85% of total funds raised, Domestic loans haverolled out to be the key external source for financing capital investments, In 1981 state

budgetary appropriation financed to 28.1% of the total fixed asset investment, however in

mid 2000s the contribution of state budget was only about 10% of state owned companies

total funding and subsequently loan size has moved from short term to long term loans.

2.4.2 Banking Sector in China

The banking sector in China primarily comprises of state-owned commercial banks and

policy banks, the banking segment is mostly controlled by 4 state-owned banks namely

the Industrial & Commercial Bank of China (ICBC) specialized in lending to industrial

sector, China Construction Bank (CCB) traditionally focused on infrastructure

development, Bank of China (BOC) conventionally responsible for foreign exchange and

financing of imports & exports and Agricultural Bank of China (ABC) primarily focused

on lending to agriculture and rural development contributing about 60-70% of the

domestic banking business. At the end of year 2001 80 percent of payment business and

62 percent of saving and lending business was contributed by these Big Four banks and

they had approximately 80,000 branches nationwide by the end of 2006.These four banks

remained as specialized banks until 1994 when three policy banks were conventional to

take over the policy-directed lending functions. Commercial banks equity ownership is


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distributed among both the private and state investors, which account for 18 percent of

the banking sector assets.

2.5 Economic growth in India

The Indian financial system has witnessed phenomenal changes during last five decades.

Indian economy may be termed as a Mixed economy where both private and public

sectors co-exist. India has instigated economic development of the nation with the

commencement of planning commission. The main objective of the Five year plans was

to boost domestic savings for the growth of the economy. The industrialisation strategy

highlighted on the expansion of heavy industries, however the economic growth achieved

in the first three Five-year plans was insufficient to meet the goals of development.

Indian economy has witnessed drastic increase in the rate of growth since 1980s, the

annual growth rate of the country was 5.5 percent, A high rate of investment was a major

factor for the rise in economic growth, there was a move up in investment from

19percent of GDP in 1970s to 25percent of GDP in 1980s. During 1980s Indian

government had implemented liberalisation policy and amended several government

regulations especially in foreign trade sector, new strategies were adopted to pool up

private capital in form of foreign direct investment (FDI), New reforms were formulated

to attract foreign investors which contributed to progress of Indian economy discussed by

Roland (2007), Since 1992 till 1994, the overall value of imports surpassed that of Indias

exports and by 1996 the export figures raised from 0.84 trillion rupees to 1.1 trillion

Indian rupees, During 1993 Indian economy had witnessed major growth by the

commencement of computer software business and adopted globalisation policy which

helped in creating new job market, in the year 1995 Indian government was associated

with World Trade Organisation (WTO), During 1990-2005 the annual growth rate ofGDP was 5.9percent which was second among the worlds largest economies only after

China with 10.1percent.The republic of India since 2004 had accepted free market policy,

Service sectors played a vital role by generating 52% of countrys GDP. In 2007 Indian

economy was termed as twelfth-largest economy in the world with GDP $1.237trillion

and per capita income of $1043, Despite significant high economic growth rate Indian


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economy had many pitfalls and socio-economic variance at various levels, on an average

80% of Indian population survived on less than $2 a day.

2.5.1 The Financial System in India

The economic growth of the country is reflected by the progress of the financial system.

The financial sector acts as an agent and facilitates funds flow to areas of deficit from the

areas of surplus. A financial structure is a combination of various financial markets,

financial intermediaries and instruments.

2.5.2 The Financial Market:

A financial market can be broadly termed as the market where the financial assets are

generated or relocated. The financial market can be categorised further into four groups

by Kumar (2005).

Capital Market: The capital market deals with financing long-term investments, the

funds available in this market will be for a year or more.

Money Market: The money market is intended as short-term instrument, transactions

period generally range from single day up to a year. This market is treated as low-risk

and highly liquid due to which it is predominately conquered by banks, government and

the financial markets.

Credit Market: Credit market aims at providing short, medium and long term loans

through banks and various financial intermediaries.

Forex Market: This market is regarded as the most advanced and amalgamated market

across the world, it directly deals with exchange of currencies and funds transfer will

happen based on the exchange rate.


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2.5.3 The Financial Intermediaries:

The financial institution acts as a proper channel for the transfer of funds between

investors and firms through this process certain assets or liabilities are converted into

different assets or liabilities.

Please refer to the table below to study the various financial intermediaries and role in

different financial markets.

Table 2.5.3.1: Financial intermediaries and its role in different financial markets

Intermediary Market Role

Stock Exchange Capital MarketSecondary Market tosecurities

Investment BankersCapital Market, CreditMarket

Corporate advisory services,Issue of securities

UnderwritersCapital Market, MoneyMarket

Subscribe to unsubscribedportion of securities

Registrars, Depositories,Custodians Capital Market

Issue securities to theinvestors on behalf of thecompany and handle sharetransfer activity

Primary DealersSatellite Dealers Money Market

Market making in governmentsecurities

Forex Dealers Forex MarketEnsure exchange inkcurrencies

Source: Adapted from Kumar D.A, Financial System: Lokamanya Tilak P G College of

Management.

2.5.4 The Financial development in India

The significance of the relationship between financial development and economic growth

has been distinguished and highlighted in the field of the economic development.

Although recent studies on this subject seem to accept the hypothesis that financial

development is crucial for successful economic growth Jung (1986). The economist


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Patrick observed two possible patterns in the casual relationship between financial

development and economic growth. In the first pattern the growth persuades the

expansion of the financial organisation whereas the expansion of the financial structure

precedes the demand for its services in the second pattern.

The financial system in India during the pre-reform period fundamentally catered to the

needs of planned development in a mixed-economy framework, in which the government

sector had a major role in economic activity. Interest rates on Government securities were

artificially pegged at low levels, which were not related to the market conditions. The

structure of administered rate of interest were characterised by the in depth research on

the lending and the deposit segment which in turn leaded to complexity and multiplicity

of interest rates. The financial sector environment in India in the early years of

independence was disposed by segmented and under developed financial markets

connected with lack of financial instruments. On the other hand, by late 1980s, focussed

and availability of bank credit to certain sector at lower interest rates negatively affected

the viability and profitability of banks. However after the introduction of liberalisation

policy in early 1990s Indian banking sector has grown rapidly and expected to enjoy

even greater growth opportunities in the future.

2.5.5 The Banking Sector in India

Financial organisations may be defined as economic agents focusing in the buying and

selling activities and at the same time may be very often termed as financial bonds and

securities. Banks may be classified as a division of the financial institutions, Banking

institutions will buy the securities issued by the borrowers and will sell them to the

lenders. Murthy, et al., (2008) A bank is an institution whose current operations consistin granting loans and receiving deposits from the public.

Definition of Banking as per the Banking Regulation Act, 1949 says-banking means

the accepting, for the purpose of lending or investment, of deposits of money from the

public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or


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otherwise. The Act defined the functions that a commercial bank can undertake and

restricted their sphere of activities.

Economists have been asking the question whats different about banks. In his famous

article, Corrigan (1982) argued that banks are special because:

a) They provide transaction services and administer the nations payments system

b) They provide backup liquidity to the economy

c) They are transmitters of monetary policy

The above mentioned argument, we understand that banks grant loans in the itinerary of

providing liquidity and they accept demand deposits in providing transaction services and

the most distinctive fact is that only commercial banks have the uncurbed authority to

issue commercial loans and accept demand deposits.

The Indian banking sector played a significant role in the financial development with

deposits of more than half a trillion US dollars and contributes about three-quarters of

nations financial assets. The Indian banking system has a long and detailed history of

more than 200years. The General Bank of India was considered to the first bank to be

established in the nation followed by The Bank of Hindustan in the year 1870 however

these banks are now obsolete nevertheless the country witnessed the commencement of

the Bank of Bengal in Calcutta in 1806 which is now known as the State Bank of India

the largest bank of the nation detail given in the Indian Financial System (Anon., 2008).

During 1900s the financial market has expanded with the commencement of banks such

as Allahabad Bank, Punjab National bank and Bank of India, in the year 1935 Reserve

Bank of India which was considered to the Central Bank of India started regulating the

banking sector in India. During the period of First World War (1914-1918) functioning of

94 banks failed in the country and the same phase continued till India achieved

Independence in 1947. The Reserve bank of India was nationalized and was possessed by

the Indian government in the year 1948 and after the enforcement of the Banking

Regulation Act RBI got the authorization to standardize, direct and inspect the banks in

the country in 1949 and it also instructed that no institute should be started without its


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license. In the year 1969,Indian government has nationalised 14 largest public banks

resulted in the raise of Public Sector Banks(PSB) share of deposits from 31% to 86%

( Roland, n.d.). The primary purpose of Nationalisation policy was to set up more

branches and to mobilise the deposits. During 1980 six more banks were nationalised as a

result the public sectors contribution of deposits moved up to 92%. The banking industry

estimates indicate that out of 274 commercial banks operating in the nation, 223 banks

are in the public sector and 51 fall into private sector including 24 foreign banks that had

started their operations in the country. Over the decades, banking sector has grown

gradually in size, Since Indian government had adopted the liberalisation policy banking

sector had undergone several changes in its structure by the establishment of several

private sector and foreign banks accounting for over 80% of deposits and credits.

2.5.6 Liberalization Policy

India since its independence had experienced many setbacks due to various tyrannical

policies in the banking sector. In the year 1991 the country has witnessed significant

amendments in economic policy by the adoption of liberalisation clearly written in the

words by (Delong, 2002). The important policy objectives were the expansion of money

markets, commencement of treasury bills and interest rate deregulation. During early

1990s, under the leadership of Prime Minister of India Sri P.V.Narsimha Rao the

government had set up Narsimham committee which initiated several reforms in the

banking sector. The sole intention of the reforms was to standardise direct credit rules,

decrease in CRR and SLRlegal price regulation, distributing resources and expansion of

private sector. The implementation of new reforms resulted in widening the branch

network as a result in the year 1991 (Roland, n.d.) and Shirai (2001), the nation witnessed

27 public- sector banks, 26 private sector banks with a network of 60,000 branches, 24foreign banks with 140 branches and 20 foreign banks with a representative office.


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2.6 India Vs China

The economic growth of any nation is predominately influenced by its financial

development. The economies of China and India experienced the higher growth rate in

the recent years after the implementation of major financial reforms since 1970. India and

China are being treated as global engines of growth (Basu, 2007). Both the countries are

been popularly known as global giants in the World economy.

Das (2007) discussed comparatively study on the growth part of China and India as, since

1978 China has began its progress en route for a pro-market economy with a growth rate

of 3.6percent while Indian economy had observed a very low rate of 3percent to 5percent

until the financial reforms in India have been initiated since 1991 China had a major

influence of Soviet style command on its economy while India has adopted mixed

economy. The role and impact of various financial reforms on economic growth are not

similar in both the countries. The government of China had major focus on the

investment in the infrastructure which resulted in high growth rate by increase in capital

accumulation while India during the process of the financial reforms concentrated on the

elevation of private investment by minimising public investment. The per capita GDP of

the both the nations observed remarkable progress,

During 1991 Indian economy observed a steep raise in the per capita income from

1486.48 to 2885.89 by 2004 however the per capita GDP of China was 1720.85 and it

was gradually increased to 5418.87 by the end of year 2004.The average growth rate of

per capita GDP of India was 3.91percent which is three times lesser than China with

9.10percent which was mainly attained by capital accumulation and a incredible elevate

rate of savings. The average domestic rate in China and India was 39.08percent and21.86percent respectively. The gross capital formation rate of China was 36.73percent

while India was 22.93percent. The rate of gross fixed capital accumulated by India was

22.34percent whereas China was 33.67percent. The most distinguishable element of the

financial system in both the Indian and Chinese economies is the supremacy of the

banking sector which was considered as the most crucial financial institution for the


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transformation of household savings into capital investment for several industries and

firms which is more predominant in China than India. The banking sector in China was

solely influenced by public sector banks (PSB) whereas Indian economy had the privilege

of mobilisation of savings not only by public sector banks but also the functioning of Non

banking financial institutes (NBFI) such as development banks, export and import banks,

mutual funds and insurance companies.

Chinas banking sector has more bank deposits in the form of household savings in

comparison to India. The lending ratio and the bank deposits interest rates are believed to

inferior in both the economies mean while the ratio of assets of the total banking sector is

significantly higher in China in context to India which was almost double the figure. The

stock exchange in China is introduced very recently whereas in India it showed its

presence since 19th century the average number of companies listed on Indian stock

exchange is more than of China, the stock market trading volume and average market

capitalisation is drastically more in Indian economy than Chinese. Conversely the market

capitalisation growth rate of China is four times higher than India. The liquidity ratio and

turnover ratio is remarkably more in China when compared with India. The inflow of

foreign direct investment (FDI) acts as an important growth mechanism for the

development, promotion and surface of new market economies in both the countries. The

average net FDI inflow to GDP ratio for China was 3.88percent which was considered to

be higher than India with 0.60percent. On the other hand the growth rate of FDI inflow of

India was 54.25percent nearly two times more than China 29.05percent.

After the study of the literature review in this research topic, we proceed further to next

Chapter in which we discuss about Qualitative and Quantitative research methodologies,

inductive and deductive strategies and we adopt deductive strategy in this research as it

aspire to assess and determine the fundamental relationship between dependent and

independent variables. We also discuss about research design, Data collection methods

and analysis.


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Chapter 3

RESEARCH METHODOLOGY

3.1 Introduction

This chapter aims to describe the method chosen for the completion of study in order to

achieve the research objectives. The chapter looks at the research methodologies, strategy

and design. In addition, it includes information about the sources of data. It fully explores

the research techniques and methods of data collection and highlights why these were

more suited for this research. The primary motive is to layout the best methodological

approach and to research taking into account the limited resources and time constraints.

The main purpose of this research is to ascertain the impact of banking sector on the

financial development and economic growth in India in context with China. Several

economists had defined the term research in different ways. According to Cohen and

Manion (1994, p.5) Research is a combination of both experience and reasoning and

must be regarded as the most successful approach to the discovery of truth. The term

methodology may be considered to be the comprehensive of research design, hypothetical

structures, the collection and analysis of literature applicable to the area of study and

reasonable inclination for meticulous form of activities of data gathering.

Karlinger defines methodology in a more comprehensive way as Methodology research

is controlled investigation of the theoretical and applied aspects of measurement,

mathematics and statistics, and ways of obtaining and analyzing data. It can be

understood that Methodology is the perception and study of philosophy and methods andtheir functioning in the desired field of academic research in a detailed and organized

manner.


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3.2 Forms of Research Methodologies

The selection of specific methodology is mainly based on the aim, goal and nature of the

research. Few factors such as availability of time and resources also may be taken into

consideration to adopt a particular type of research methodology.

The study of research methodology can be broadly divided as :

Qualitative Research Methodology

Quantitative Research Methodology

Bryman defined qualitative research as approach to the study of the social world which

seeds to describe and analyze the culture and behaviour of human and their groups from

the point of view of those being studied (2004:178). The study of Qualitative research

methodology refers to the connotations, ideas, descriptions, features, images, symbols

and explanation of things. The primary emphasis of the Qualitative research methodology

is to gather, scrutinize and interpret the data by examining people and their behaviour.

The purpose of qualitative research is not to build up a new theory however to analyse the

existing theory. The Qualitative research is considered to be subjective and it is the

examination of what is believed to be a forceful reality.

Lynch and Bogen (1997) believed that Qualitative research is based on interpretivism,

and interpretive social scientists believe that social reality is based on the overall social

behaviour, and the researchers try to understand what meanings people give to reality, not

to determine how reality works apart from based on social behaviour these interpretations

reported by (Kumar, 1999).

Nevertheless Quantitative Research Methodology is solely relied on positivist beliefs and

the intention of quantitative research is to set up official relationship between specific

variables. Wallace defines quantitative research as Whatever nature really is, we

assume that it presents itself in precisely the same way to the same human observer

standing at different points in time and space, and we assume that it also presents itself in


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precisely the same way across different human observers standing at the same point in

time and space (Wallace, 1983, p.461). Most commonly this research method is

objective and speaks all about figures, intent real data and is based on descriptive

theories. Quantitative research is illustrated as the collection of numerical data and as

exhibiting a view of the relationship between theories and research as deductive, and it

ends up with objective result (Bryman, 2001, p.62).

3.3 Research Strategy and Design

In an academic and realistic study many researchers may not require a strategy in order to

execute the assigned research project. The research strategies may be known as structured

processes which have been experimented and examined many times in several years.

However the findings and outcome in each case may be alike if not identical. Developing

a unique research strategy has the singular advantage that it enables the researcher to

adopt and adapt the most suitable research methods to understand the phenomenon in

question (Eisenhardt, 1989)

The concept of research strategies may be classified into two groups such as deductive

research and inductive research strategy. The deductive research strategy may be applied

in Quantitative research methodology when a specific research already exists and then

conduct examinations to determine the validity of logical or theoretical expectations. On

the other hand, many researchers may observe a link between social theory and data. The

inductive research often revolves around existing observations and target at identifying

theories that preside over what is experimental. This strategy is generally exercised in

Qualitative research methodology. The primary purpose for conducting research is also

vital in selecting the research strategy which is most relevant. The deductive strategy maybe adopted if the aim of the research is evaluative while explanatory motive indicate an

inductive research strategy. The foremost objective of this study is to ascertain the

relationship between theory and data by applying the existing theory and principles. This

research is purely based on deductive strategy as it aims to assess and determine the

fundamental relationship between dependent and independent variables. Ranjit kumar


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by applying the Pearsons product moment correlation coefficient and then T-result is

applied to arrive at the conclusion whether to accept or reject the null hypothesis.

3.4.4 Objective 4:

The focus of this final objective is to examine the role of banking sector played in the

financial development and economic growth of India in context with China. A

comparative study is also conducted to ascertain the salient features and similarities in

both the economies. For this purpose, statistical data for Gross domestic product of both

the countries was gathered from World Bank, International Monetary fund, rate of

interest and domestic savings of India were collected from Reserve Bank of India on the

other hand Chinas interest rates and household savings were collated from Central bank

of China and the same was concluded by graphical representation.

3.5 Advantages of Secondary Data:

Higher quality data than those collected personally (Stewart and Kamins, 1993;

cited in Saunders et al, 2007)

Permanence of data (Weijun, 2008)

Triangulate findings (Saunders et al, 2007)

Abundance of data

Churchill (1996) asserts that its good to start with secondary data and move on to

primary data when the secondary data lead nowhere.

Unobtrusive ( Weijun, 2008)

3.6 Limitations


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The main focus in this research would be to pursue a cross-sectional study bearing in

mind the time constraint and also subject to the fact that the banking industry will not

reveal the data for security purpose to undergone a longitudinal study. Hence this

research would be carried out using secondary data which is already available through

various sources and would be dealt in detail in further sections. Reliability of the findings

could be guaranteed by the mere fact that the participant error or biased views did not

take place as secondary data is used. The research findings may vary upon circumstances

and industry type.

3.7 Ethics Disclaimer:

Research ethics relates to questions about how we formulate the research topic, design

the research process and gain access, collect and process data and write the data in amoral

and socially responsible way (Saunders et al, 2007). It is highly unlikely to observe any

deviations from the above foresaid statement.

3.8 Synopsis:

In the light of the above information, it is evident that the author has adopted the

deductive strategy in this research and also stated that the research was based on

secondary data. After the research study on research design, methodologies and data

collection methods in this chapter we move on to the next chapter where we finally

conclude about the research findings on how the banking sector played the most vital role

on the financial development and economic growth of India in context with China.

After the detailed description about research methodologies, strategy, design and data

collection methods we progress further to Chapter 4 Research findings where we examine

the fundamental relationship between Gross Domestic product and various indicators of

financial development and economic growth by graphical representation and to examine

the correlation coefficient of variables by applying t-test.


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deposits and electronic currency (M1) plus time and savings deposits, foreign currency

transferable deposits, certificates of deposit, and securities repurchase agreements (M2),

plus travellers checks, foreign currency time deposits, commercial paper and shares of

mutual funds or market fund held by domestic residents.

4.4 Domestic credit facilitated by the Banking sector (Percentage of GDP)

The Domestic credit provided by the banking sector consists of all credit to various

sectors on a gross basis, excluding credit to the central government, which is Net. The

banking sector includes monetary authorities and deposit money banks, as well as non-

banking institutions where data is available.

4.5 Market capitalization of listed companies (Percentage of GDP)

Market capitalization is widely known as the capital of a market. Market capitalisation of

a particular stock is the sum of number of outstanding shares of the company multiplied

by the share price of that particular stock. Market capitalisation is a good pointer of the

health of capital markets of an economy. Leading economies of the world have huge

market capitalisation in relation to their Gross domestic product (GDP).

4.6 SPSS results with absolute values & application of T-test

Pearsons product moment correlation coefficient is used to find out the relationship

between selected economies with a variable GDP, DCRD, MCAP, INF, Rate of Interest

& Domestic Savings and then T-test is applied to arrive at the conclusion whether to

accept or reject the null hypothesis. Following hypothesis are derived in order to examine

the significant relationship between the economic growth in India and China.

0H :Pr = 0

1H : Pr 0


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Figure 1: Trends in GDP and M3 (Money Supply) in India

0

10

20

30

40

50

60

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Years

%age

India GDP M3

Figure 1 depicts that the annual percentage growth rate of GDP and M3 as a percentageof GDP in India. In the year 1993 the annual percentage GDP was 22% where as the M3

was 13% and there was a rapid rise in the GDP by 17% in 1997 while M3 increased by

10%. GDP had mounted up to 50% in 2003 with little fluctuations on the other hand M3

slightly moved up to 26% with little volatile in between 1998-2003. The graph shows a

rapid growth rate between 2001- 2003 where M3 has risen from 1996-1997 however

continuously gone down from 1997-2001, there after increasing trend remained constant

over the coming years. Therefore, it may be concluded that there is a positive correlation

between two variables in the long run.

Table 1: The Regression result of GDP and M3 of India

Correlations

GDP M3

GDP Pearson Correlation 1.000 .531**

Sig. (2-tailed) .004

N 27.000 27

M3 Pearson Correlation .531** 1.000


N 27 27.000

**. Correlation is significant at the 0.01 level (2-tailed).


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Paired Samples Test

Paired Differences

Mean

Std.

Deviatio

n

Std. Error

Mean

95% Confidence Interval

of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 GDP -

M3-7.785635

8.35753

51.608415 -1.109186 -4.479505 -4.841 26 .004

t(26) = -4.841p = 0.004 < 0.05r = 0.531 (positive)

From the above table it is found that Gross Domestic Product is positively correlated with

M3 (Money Supply).The value of r represents a very strong positive correlation

between two variables. Since the value oft is less than 1.960 we reject the null

hypothesis. Therefore it is observed that Economic growth of a open economy is

influenced or determined by M3. The money supply in India has gone up in the modern

economy; this in turn will have a positive impact on the growth of bank loans which is

considered to be a positive sign for the economic growth as people can easily borrow. In

addition, the financial development of India is predominately related to the levels of

economic growth.


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Figure 2: Trends in DCRD, Inflation & GDP in India

0

10

20

30

40

50

60

70

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

%age

CDRD GDP INF

Figure 2 illustrates that the domestic credit provided by the banking sector (DCRD)

measured as a percentage of GDP and percentage change in inflation (INF) as measured

by consumer price index and GDP. In 1993 DCRD was 50% while INF was 6%,

meanwhile DCRD dwindled by 3% in 1997 and INF was just above by 1% with little

fluctuations. DCRD reached its peak with 59% in the year 2002 with constant increase on

the other hand inflation dipped to 4%. The above graph demonstrates the increasing trend

in domestic credit provided by the banking sector since 1995 and decreasing trend in

inflation except in 1998. Therefore we may observe a negative correlation between two

independent variables.

Table 2: The Regression results of DCRD & GDP of India

Correlations

DCRD GDP

DCRD Pearson Correlation 1.000 .138


N 11.000 11

GDP Pearson Correlation .138 1.000


N 11 11.000


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Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 DCRD

GDP

45.9736

46.09711 1.83835 41.87754 50.06973 25.008 10 .000

Through the regression coefficients it may be inferred that GDP is positively affected

from the changes in DCRD and negatively affected from the change in INF, An increase

in DCRD leads to high rate of growth in GDP While an increase in INF causes the

decrease in GDP. This denotes that both the variables are statistically insignificant. In

other words, t-test result represents that both explanatory variables DCRD and INF are

insignificant over dependent variables at 5% level of confidence.

Figure 3: Trends in Inflation and GDP in India

0

2

4

6

8

10

12

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Years

%age

0

2

4

6

8

10

12

14

16

India GDP India Inf

Figure 3 represents the relationship between Gross domestic product (GDP) and Inflation

(INF) of India. In the year 1980 the GDP was 3.6percent where as INF was 11.4percent


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and the graph represents that there was a high fluctuation in INF and GDP during 1980

-2000. Conversely in the year 2000 2008 INF steadily increased which resulted in

tremendous rise in GDP. It may be understood that a gradual rise in the inflation will

have a positive impact on the economic growth (GDP) on the other hand economic

growth will be negative if the rate of inflation is too high or low.

Table 3: The Regression results of Inflation & GDP of India

Correlations

GDP Inflation

GDP Pearson Correlation 1.000 -.214


N 21.000 21

Inflation Pearson Correlation -.214 1.000


N 21 21.000

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t Df

Sig. (2-

tailed)Lower Upper

Pair 1 GDP

Inflation

-

3.490483.45918 .75485 -5.06507 -1.91588 -1.124 20 .000

From the above regression table it is found that Inflation is negatively correlated with

Gross Domestic Product as the value of r is -0.214 (negative) which shows weak

negative correlation between the variables. The significant value of p value is 0.351 >

0.05 which represents that there is a significant difference between the means of two


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Figure 5: Trends in Market Capitalization and GDP in India

0

10

20

30

40

50

60

70

80

90

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Years

%age

MCAP GDP

Figure 5portrays the relationship between Market Capitalisation (MCAP) and GrossDomestic Product (GDP). Initially in the year 1993 GDP was 5% and MCAP stood at

34% conversely GDP had slightly lifted up by 2% in 1997 and MCAP rapidly boosted up

to 61% with major fluctuations in the due course. GDP increased from 4% to 7% between

2001- 2003 on the other hand MCAP reached its peak to 80% after a series of ups and

downs. This graph shows that the market capitalisation of listed companies (MCAP)

increased with GDP and vice-versa. Therefore it may be understood that the overall

positive correlation exists between two variables.

Table 4: The regression results of MCAP & GDP of India

Correlations

MCAP GDP

MCAP Pearson Correlation 1.000 .393


N 18.000 18



N 18 18.000


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Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 MCAP

GDP

308.7919

4155.42384 36.63375 231.50149 386.08240 8.429 17 .000

The main findings of the study may be summarized as follows: There is bidirectional

causality between real market capitalization and real GDP growth rate. Secondly the

results suggest unidirectional causality between market capitalization and volatility to

real GDP growth in Indian economy. The value of r is 0.393 which denotes very strong

positive correlation between both the variables. The above test results suggest that market

capitalization development leads to economic growth. The funds raised by the corporate

from the financial markets during the study period thus played the important role for the

appreciable growth registered by the Indian economy.

Table 5: The Regression results of India GDP & China GDP

Correlations

India GDP China GDP

India GDP Pearson Correlation 1.000 .063


N 15.000 15

China GDP Pearson Correlation .063 1.000


N 15 15.000

*. Correlation is significant at the 0.05 level (2-tailed).


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Paired Samples Statistics

Mean N Std. Deviation Std. Error Mean

Pair 1 India GDP 5.6800 15 1.59607 .41210

China GDP 9.7200 15 2.66356 .68773

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 India GDP

China GDP

-

4.04000 3.19057 .82380 -5.80688 -2.27312 -4.904 14 .000

Gross Domestic Product of India & China

Ho: Pr = 0

H1: Pr 0

In table it is found that annual Gross Domestic Product is positively correlated between

India and China. Value of r is 0.063 which shows very strong positive correlation

between the variables. The significant level of P-value is 0.823 which means there is no

significant difference between the means of the two groups.

Since the value of T from the table is -4.904 so we will reject the null hypothesis (Ho)

and (-4.904


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Figure 6: Trends in Gross Domestic Savings (percent of GDP), Rate of Interest and

GDP in India

0

2

4

6

8

10

12

14

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Years

%age

0

5

10

15

20

25

30

35

GDP ROI Gross Domestic Savings (percent of GDP)

Figure 6 Illustrates that the relationship among the rate of interest (ROI), Gross Domestic

Savings (GDS) and Gross Domestic Product (GDP).In the year 1990 ROI was 10%

where as GDS was 23.1% and GDP was 6.1%. Since 1991 1995 GDS had gone up as

the interest rate increased which in turn resulted in growth of GDP except in the year

1992 and 1993 due to several other factors. However a fall in interest rate may be

observed from the year 1997 - 2004 GDS had remained constant or increased slightly as

the depositors continued to maintain household savings irrespective of change in interest

rates. As the GDS increased GDP also mounted up. In other words a rise in Gross

Domestic Savings (GDS) leads to better economic growth (GDP) of India.


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Table 6: The Regression results of rate of Interest (ROI) and Gross Domestic

Savings (percent of GDP) of India

Correlations

ROI GDS

ROI Pearson Correlation 1.000 .715**


N 15.000 15

GDS Pearson Correlation .715** 1.000


N 15 15.000

**. Correlation is significant at the 0.01 level (2-tailed).

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean

95% Confidence

Interval of the

Difference

T df

Sig. (2-

tailed)Lower Upper

Pair 1 ROI

GDS

15.2800

0 4.52374 1.16802 12.77484 17.78516 13.082 14 .000

In conducting the significantt test it may be concluded that interest rate of deposits are

positively correlated with Gross Domestic Savings. The value of r is 0.715 which

denotes slightly positive correlation between the variables as the r value is nearer to

Zero. Since the value oft is 13.082 > 1.960 so we reject the null hypothesis (Ho) which

shows the relation between the variables are significant.


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Table 7: The Regression results of Gross Domestic Savings (percent of GDP) and

GDP of India

Correlations

GDS GDP

GDS Pearson Correlation 1.000 .322


N 15.000 15



N 15 15.000

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 GDS

GDP31.51333 3.56729 .92107 29.53784 33.48883 17.214 14 .000

By applying thet test it may be understood that Gross Domestic Savings are positively

correlated with Gross Domestic Product. The value of r is 0.322 which indicates

slightly positive correlation between the variables as the r value is nearer to Zero. Since

the value oft is 17.214 > 1.960 so we reject the null hypothesis (Ho) which emphasis the

relation between the variables are important.


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Figure 7: Trends in Gross Domestic Savings (percent of GDP), Rate of Interest and

GDP in China

0

2

4

6

8

1012

14

16

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

0

10

20

30

40

50

60

GDP ROI Gross Domestic Savings (percent of GDP)

Figure 7 demonstrates the link connecting the Gross Domestic Savings (GDS), Rate of

Interest (ROI) and GDP of China. In the year 1990 the rate of interest was 8.64% and

GDS was 38.8%, while in 1994 interest rate raised by 2.3% as a result GDS went up to

42.7% and GDP reached its peak to 13.1% with little fluctuations. Since 1997 till 2004 it

may be observed that there was steady decline in the interest rates without having any

major affect on the GDS as the depositors sustained to maintain good household savings

and the graph also represents the increase in GDP whenever there is a rise in GDS. Thesame may be proved by applyingt test as mentioned below

Table 8: The Regression results of Rate of Interest (ROI) and Gross Domestic

Savings (percent of GDP) of China


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Correlations

ROI GDS

ROI Pearson Correlation 1.000 .171


N 15.000 15

GDS Pearson Correlation .171 1.000


N 15 15.000

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

t df

Sig. (2-

tailed)Lower Upper

Pair 1 ROI

GDS

35.4613

35.34285 1.37952 32.50256 38.42010 12.706 14 .000

In conducting the significant t test it may be concluded that interest rate of deposits are

positively correlated with Gross Domestic Savings. The value of r is 0.171 which

denotes slightly positive correlation between the variables as the r value is nearer to

Zero. Since the value of t is 12.706 > 1.960 so we reject the null hypothesis (Ho) which

shows the relation between the variables are significant.


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Table 9: The regression results of Gross Domestic Savings (percent of GDP) and

GDP of China

Correlations

GDS GDP

GDS Pearson Correlation 1.000 .499


N 15.000 15



N 15 15.000

Paired Samples Test

Paired Differences

Mean

Std.

Deviation

Std. Error

Mean


of the Difference

T df

Sig. (2-

tailed)Lower Upper

Pair 1 GDS

GDP

18.5666

71.99129 .51415 17.46393 19.66941 14.111 14 .000

It may be once again proved that Gross Domestic Savings are positively correlated with

Gross Domestic Product. The value of r is 0.499 which indicates slightly positive

correlation between the variables as the r value is nearer to Zero. Since the value oft is

14.111 > 1.960 so we reject the null hypothesis (Ho) which emphasis the relation

between the variables are important.

Table 10 Financial Development my Income group, worldwide, 1990s (assetscapitalization as percentage of GDP)

Banks NBFIsStock

markets Total

High income countries 81 41 33 155Upper middle incomecountries 40 21 11 72


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Lower middle incomecountries 34 12 12 58

Low income countries 23 5 4 32

Source: Adapted from Fitzgerald, World economic and social survey: Oxford University.

By analysing the data from the above table 10 it may be conclude that greater financial

depth (that is, higher ratios of total financial assets to national income or output) is linked

with higher levels of productivity as a result high per capita income. Secondly, that the

later were also associated with more sophisticated financial system, which means the

shift from banks towards non-bank financial intermediaries and from both of these

towards stock markets.

Synopsis:

In the light of the above information, it is clear that there exists a fundamental

relationship between Gross Domestic product and various indicators of financial

development and economic growth. In order to prove this, we utilised the secondary data

from IMF and RBI websites and interpreted the data by graphical representation and

applied T-test in SPSS to calculate the regression to show the correlation between various

financial indicators of India and China which helped to arrive at a final conclusion that

Chinas economy performed well because of its rapid development of banking sector

which had enhanced household savings, high national savings and interest rates as a

result market capitalisation, domestic credit provided by the banks were increased which

in turn lead to the high growth rate of Gross Domestic Product. From here we move on

further to next chapter Conclusion and Recommendations which outlines the summary of

the dissertation topic.

Chapter 6

REFLECTIONS ON LEARNING


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Reflection is a process of reviewing an experience of practice in order to describe,

analyse, evaluate and so inform learning about practice (Reid, 1993).

The author believes that reflection is necessary to learn from the study and experience got

while doing the dissertation. The work on this dissertation has been a knowledge

understanding in several ways. The author is able to evaluate his own strengths and

weaknesses which in turn gave the author a chance to enhance his strengths and try to

overcome those shortcomings which are necessary to become a qualified financial

manager in competitive business world.

Since Author was used to conventional methods of education in the past, independent

learning was a novel experience and author found it difficult at the

Documents

The Role of Banking Sector in the Economic Growth of India Comparative Study With China