Investigating the inter-sectoral linkages in the Indian economy and understanding the role of financial services sector

Abstract

The purpose of this study is to analyse the intersectoral linkages across different sectors in the economy with prime focus on understanding the role of the Financial Services sector in transferring the impact of economic growths and shocks into the other sectors of the economy via these linkages. For an industry in the economy, consumption of services or goods could be done by another sector of the economy or by the final consumers, which can be government, households, or any other agent contributing to the demand exogenous to the industrial complex. For multiple sectors, services or goods provided by a sector could be the input or raw materials. Therefore, all the sectors have a substantial direct contribution to each other's performance. The study is aimed to find the direct effect of one sector to another sector of the economy and, at the same time, understand the indirect spillover effect via the Financial Services sector. Multiple approaches have been adopted to arrive at the possible inter-sectoral relationships among these sectors for the analysis. In the first approach, the classical Leontief model was implemented using I/O data for 32 sectors in the Indian economy for 23 years from 1995 to 2017. The data has been collected from Asian Development Bank & World Input-Output Database. In the second half of the study, these I/O models were further strengthened by analyzing the sectorial level performance data using linear and non-linear analytical models. For developing the linear and non-linear models, sectoral level performance data such as revenue, credit allocation, etc. was collected for 12 years from 2008 to 2019 at a quarterly frequency. The data has primarily been collected from CMIE Industry Outlook. For multiple performances indicating variables, bi-variate and multi-variate linear models were developed followed by development of advanced non-linear models using neural network to identify non-linear relationships between sectors' performances.