Essays on banking sector development and economic growth in developing economies.

This thesis examines the impact of banking sector development in economic growth in developing countries. Chapter 1 examines the linkage between financial development and economic growth in an economy with an informal and a formal sector. We find that growth in such economies is mainly stimulated by human capital and higher allocations in the formal sector. Higher revenue through consumption taxation in the formal sector that results in more redistribution creates a multiplier effect on growth. For developing countries there is therefore a need to design policies that encourage accumulation of human capital and a shift of the additional human capital to the formal sector. Chapter 2 empirically examines how banking development affects growth in regional output, agriculture and industry in India. Using state level data for India for 1999-2008, we examine if and to what extent the recent banking reforms have affected regional growth. Results show that there is strong evidence of banking development-led growth effects in India. Deposits of commercial banks positively affect growth in industry but do not significantly affect growth in agriculture. Rural banks' credits stimulate agricultural growth. Given the large share of agriculture in Indian GDP, this clearly implies that expansion of regional rural banks can positively affect economic growth in India. Chapter 3 extends chapter 2 by examining how and to what extent development in infrastructure and rural well being can assist in explaining the banking development-led growth in state level output, agriculture and industry in India. We find that there is clear evidence of growth effects of development in banking, infrastructure and rural well being in 26 states of India. Transport expansion generally improves growth in output and industrial output, but more allocation of production in the informal sector can hurt growth. Improvement in rural well being can stimulate growth. A major determinant of the success of rural banking development-led growth in India is therefore the development of physical infrastructure and rural well being