Dynamics of Market Structure and Competitiveness of the Banking Sector in India and its Impact on Output and Prices of Banking Services

Abstract

The paper examines the nature and the extent of changes in the market concentration in the Indian banking sector and their possible implications on prices and output of banking services. The first part of the paper attempts to measure market concentration in banking in India in alternative ways from 1989-90 to 2000-01. In contrast to earlier empirical applications on banking, it focuses on both static and dynamic measures of market concentration. The paper finds a strong evidence of change in the market structure in banking in India. Interestingly, results reveal that a major part of the change in market structure occurred during the early 1990s. Despite a spate of mergers during the late 1990s, market concentration was not significantly affected. It is also observed that the different concentration ratios rank the changes similarly over time. The second part of the paper analyses the possible impact of changes in banking market structure on prices and output of this sector during the same period. It is demonstrated that measurement problem of real output pertaining to banking sector in the national income data could be severe. The implied inflation as obtained through the GDP deflator for the banking sector in India led to unbelievable measures of inflation for banking

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