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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
Sig. (2-tailed) .004
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
Sig. (2-tailed) .687
N 11.000 11
GDP Pearson Correlation .138 1.000
Sig. (2-tailed) .687
N 11 11.000
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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 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
Sig. (2-tailed) .351
N 21.000 21
Inflation Pearson Correlation -.214 1.000
Sig. (2-tailed) .351
N 21 21.000
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 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
Sig. (2-tailed) .107
N 18.000 18
GDP Pearson Correlation .393 1.000
Sig. (2-tailed) .107
N 18 18.000
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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 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
Sig. (2-tailed) .823
N 15.000 15
China GDP Pearson Correlation .063 1.000
Sig. (2-tailed) .823
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
95% Confidence Interval
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**
Sig. (2-tailed) .003
N 15.000 15
GDS Pearson Correlation .715** 1.000
Sig. (2-tailed) .003
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
Sig. (2-tailed) .242
N 15.000 15
GDP Pearson Correlation .322 1.000
Sig. (2-tailed) .242
N 15 15.000
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 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
Sig. (2-tailed) .541
N 15.000 15
GDS Pearson Correlation .171 1.000
Sig. (2-tailed) .541
N 15 15.000
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
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
Sig. (2-tailed) .058
N 15.000 15
GDP Pearson Correlation .499 1.000
Sig. (2-tailed) .058
N 15 15.000
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 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