DO PUBLIC SECTOR BANKS PROMOTE REGIONAL GROWTH? EVIDENCE FROM AN EMERGING ECONOMY

Abstract

A large literature exists on the relationship between financial development and economic growth. However, the role of government and public banks in building this relationship has remained contentious. In a sub†national level analysis in the Indian context, we raise the question: What is the relative impact of public banks in economic growth in the lagging regions vis†A †vis leading regions? Do they matter more than private and foreign banks? To address these problems, we apply a dynamic generalized method of moments panel estimation to an unbalanced panel dataset drawn from 25 Indian states covering the period 1996/97 to 2008/09. Although our study focuses on the Indian context, it is relevant to developing countries for two main reasons: government ownership of banks is prevalent in developing countries; and in many large countries with a federation set†up inter†state differences may exist with multiple ownership of the financial sector.