Bank Nationalization, Financial Savings, and Economic Development: A Case Study of India

The statistical analysis of financial savings, investment, government expenditures, and growth performance of the Indian economy in the past 35 years shows that bank nationalization has been a mixed blessing. The aggressive bank branch expansion program under the auspices of bank nationalization has increased financial savings, but the credit allocation program associated with it has had a negative effect on deposit mobilization and capital accumulation. More generally, the result confirms prior findings that financial savings are likely to increase with interest rates, especially if they become positive in real terms. Furthermore, the rise in deposits should lead to a higher level of investment, thereby promoting growth. Administered credit allocation since bank nationalization may have discouraged the accumulation of financial savings. The analysis also indicates that developing countries like India should maintain a firm grip on inflation.