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How Is Banking Industry Affecting GDP Growth?

Having people's trust at its core, it continues to drive up GDP growth and follow regulations and mandates to avoid any economic disruption.

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The development of the banking sector plays a pivotal role in the economic development of any country. Capital or funds can be considered as one of the essential components while measuring the growth of a nation and a developed and able body that can administer the entire financial system is given paramount importance. Thus, to attain a steady GDP growth and ensure economic development, the valuable services of a developed financial system of the country are taken into consideration.

To understand economic development, one must understand the notion of demand and supply, which are the basic principles of any economy. An economy grows when there is consumption, that is, there is a demand for goods and services of various sectors. Consumption can be looked upon as a driver of GDP growth. However, when products are manufactured, and there is a dearth of consumption, the industry will hit a recession, as faced by the automobile industry in the past year. 

The Backbone of GDP Growth:

While our government is taking great efforts in directing our economy to a healthy track by taking steps like lowering the corporate tax cut to call upon investment by multinational companies further leading to employment generation, aiding India in climbing the ladder of GDP growth, it is also ensuring that the banking services do not suffer as internal as well as external trade along with industrial sector are dependent on it. The loans offered by banks to the consumers as well as the investors improve the standards of living for people and lowers the economic recession substantially.

Banks help in Capital Formation, Promote Industrial Bloom and Generate Employment. 

To set up any business or industry, a significant amount of capital is required, and the banks have a considerable role to play here. After collecting deposits from the depositors, the banks use these savings as investments and make use of it to provide loans and advances to the budding businesses in dire need of funds. This way, the banking industry becomes a direct stakeholder of creating employment in the country, which eventually contributes to GDP growth. For any country, being self-sufficient in food production is a major goal. The commercial banks bridge any financial gaps in the agricultural sector and promote farming by supporting farmers with loans and advances at lower interest rates compared to loans and advances meant for other businesses. Such propositions take our economic system to the higher plains of growth.  

Banking Industry Strengthens the Government and Balances Economic Development.

The commercial banks support the government by helping with finance using various methods such as offering direct credit to government bodies and government agencies. These banks also subscribe to public debt and make investments in several of the government securities. Through this provision of direct credit, the government is able to deploy multiple development schemes. 

These banks are also spreading their wings worldwide, as well as reaching every nook and corner of the country, enabling semi-urban and rural population to avail the banking services. By granting credit to the ones in distress, these balance the economic development without differentiating or segregating and decentralize it.  

Besides contributing to the formation of initial capital required for investment, the banking industry indirectly assists the government in handling several problems namely shortage of savings, rising prices, unemployment, unbalanced development, entrepreneurial blocks due to capital limitations. This sector is crucial for the development of trade and industry as these often act as financial advisers, counsellors. Having people's trust at its core, it continues to drive up GDP growth and follow regulations and mandates to avoid any economic disruption.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Rakesh Tulsiani

Rakesh Tulsiani is the COO at Digitalabs. He has worked across industries, including Banking, Automobile, E-commerce, Government, Hospitality, Retail, Telecommunication, Health Care, Electronics, Insurance, Media, FMCG, and Education.

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