STATE-DIRECTED CREDIT AND DIVERGENT INDUSTRIALIZATION: A COMPARATIVE STUDY OF INDIA AND SOUTH KOREA, 1965-1985

This paper examines the different paths of industrialisation taken by India and South Korea between 1965-1985 using a comparative frame work based on state controlled banking and directed credit. While state influence over banking systems expanded in both countries, the goals and mechanisms of credit allocation diverged sharply. India adopted a more rule-based approach focused around priority-sector lending, rural banking expansion and broader financial inclusion whereas the South Korean government had a far more discretionary economy, funnelling credit towards export-oriented firms, strategically important industries and large-scale industrial investment. The paper analyses these differences across institutional frameworks, sectoral allocation, risk distribution, and the relationship between the state and firms. The evidence indicates that South Koreas concentrated allocation of credit was associated with substantially faster manufacturing and export growth, while Indias approach achieved greater geographical and sectoral expansion of formal finance but with weaker financial efficiency and limited structural transformation. The findings suggest that state-controlled banking was neither inherently developmental nor inherently distortionary. Rather, its effects depended on the developmental priorities, allocation mechanisms, and broader industrial strategies within which financial intervention was embedded.