Disentangling demand and supply side determinants of post-GFC credit slowdown: an Indian perspective

Abstract

In an emerging market economy (EME) that depends largely on bank-credit, it is important to decipher whether supply-side or demand-side factors are responsible for a sluggish credit growth phase. A formal empirical analysis using Indian data and a disequilibrium model suggests that demand side factors have majorly contributed to the credit slowdown during the post-GFC period and prior to the pandemic. This could be because of adequate supply of funds, and several concerted policy actions taken by the regulatory authorities to mitigate concerns over the asset quality risks. In contrast, lower investment demand and global supply side bottlenecks have often contributed to demand side weaknesses, suggesting the need for strong policy support to uphold credit demand.

Introduction to the special issue "Macroeconomic Policy in Turbulent Times in EMEs"

“…In the fifth paper of this issue, Ghosh et al (2023) analyze the deceleration of credit growth in the Indian economy after the global financial crisis (GFC). Understanding the separate influences of credit demand and supply is crucial for assessing their impact on economic growth in emerging economies.…”

“…Understanding the separate influences of credit demand and supply is crucial for assessing their impact on economic growth in emerging economies. By utilizing Indian data and a disequilibrium model, Ghosh et al (2023) overcome challenges in estimating loan supply and demand parameters. They find that credit demand factors significantly contributed to the slowdown in credit growth after the GFC.…”