Regional financial disparity in India: can it be measured?

Abstract

In this study we examine disparities in financial development at the regional level in India. The major research questions of the study are: How do we measure the level of financial development at the sub-national level? How unequal is financial development across the states? Does it vary by ownership of financial institutions? To explore these research questions, our study develops composite banking development index at the sub-national level for three different bank groups - public, private and foreign for 25 Indian states covering 1996 - 2015. Our findings suggest that despite reforms, banking development is significantly higher in the leading high income and more developed regions compared to lagging ones. Further, we find that all bank groups including public banks are concentrated more in the developed regions. Overall, over the years the position of top three and bottom three states in the aggregate banking index has remained unchanged reflecting lop-sidedness of regional development. We also note improvement in the ranking of some north-eastern states during the period 2009-15.