Can India benefit from further financial deepening?

Abstract

The role and limit to which financial development can contribute to growth of an economy has come under questioning in recent times. Previous researches have established that most of the developed economies along with developing ones have already crossed the financial development frontiers (efficiency, access and depth). This paper investigates whether India is over financed? Or is there still scope to achieve growth through further financial deepening. We have based our analysis on comparison of growth of financial systems in India over the last few decades. We further compare the current level of finance in India with other developed and developing economies. The research led us to three major conclusions. First, while urban sector in India has reached its threshold in terms of financial growth, rural India is yet to achieve access and depth in financial development. Second, although market has reached its threshold on most of the frontiers, institutions have huge potential to improve on all the frontiers. Third, however certain sectors of the economy have reached the limits of growth through financial development, most of the sectors possess huge potential for further financial deepening. All three conclusions strengthen our belief that India has not reached the threshold of financial deepening and so can still achieve growth through further financial development.