Economic reform and sector-wise allocation of credit: An extensive study of the major states in India

We know that the persistent series of crisis of most of the macroeconomic variables during the late eighties and early nineties had compelled the then government of India to take challenge of opening up the entire economy before the world which was of the objective of attaining a significant growth rate output so that all sections of the economy can be included into the single umbrella of growth process. One of the major grounds of attaining a poor rate of growth during the closed and restricted structure of the Indian economy was the poor delivery of credit to the existing sectors because of priority sector lending clause and a giant share of banking funds locked in the government securities even at low rate of interest compared to the returns from the real sectors. The aim of the reform programme in the banking sector was to reduce credit to the priority sectors and reduction of security investment in a phased manner so that the banking business can be more market oriented. The present study tries to explore whether the reform process has led to growth of credit delivery to the real sectors practically and whether it has been able to make an equitable distribution of banking fund to the different sectors of different states. Using the information of the period 1972–2008 we have come out with the results that the agriculture and industrial sectors have gradually lost their importance while the service sector has got rising share of credit so far as credit delivery is concerned within a single state and all sectors have shown rising magnitudes of state concentration but the service sector has produced greater magnitude of state concentration compared to agriculture and industrial sectors during the post-reform phase.