The nexus between growth of bank credit and economic growth is well established at national economy level. This study will add to the existing credit-growth nexus literature by analyzing the causal nexus between total credit and growth across the sub national level in India and also examining the effect of credit on economic growth. Kao’s residual based cointegration test confirmed the long run association between bank credit and economic growth in 21 states of India for the period 2001-2014. The Dimetrius Herlin panel causality test revealed the bidirectional causality between these two variables. Understanding the potential endogeneity issue, we employed Arellano-Bond (AB) GMM dynamic panel estimation procedure which solves the endogeneity as well as serial autocorrelation problem in the model. The results of the present study revealed that bank credit, capital outlay and developmental expenditure have favorable effect on economic growth of the states. As regards policy implications, the government should enhance credit level with credit risk management and improve public expenditure both in capital outlay and developmental expenditure to sustain higher economic growth.
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