Market Structure of the Indian Banking Sector

Market structure is an important determinant of both competitiveness and consumer welfare. This paper examines the market structure of the Indian banking industry over the last three years. Liberalization, deregulation and globalization could result in a more competitive structure or a more monopolistic one, depending on the ability of the Indian banks to compete with each other and with foreign banks. The standard methods of Concentration Index and Herfindahl Index indicate that the market structure is competitive and has remained so in the recent times. Surprisingly, the econometric estimates based on the Panzer-Ross methodology indicate that the market is monopolistic competitive and has become more monopolistic in the last three years. This trend appears to be slow but one cannot rule out its efficiency in the future. Only when full competitive forces are allowed in the nature of wholesome foreign competition that the market structure stabilizes.