Financial development and economic growth: empirical evidence from India

Madhu Sehrawat and Arun Giri

Studies in Economics and Finance, 2015, vol. 32, issue 3, 340-356

Abstract: Purpose - – The purpose of this paper is to examine the relationship between financial development and economic growth in India using annual data from 1982 to 2012. Design/methodology/approach - – The stationarity properties are checked by ADF, DF-GLS, KPSS and Ng–Perron unit root tests. The long- and short-run dynamics are examined by using the autoregressive distributed lag (ARDL) approach to co-integration. Findings - – The co-integration test confirms a long-run relationship in financial development and economic growth for India. The analysis of ARDL test results reveals that both bank-based and market-based indicators of financial development have a positive impact on economic growth in India. Hence, the results support the supply-leading hypothesis and highlight the importance of financial development in economic growth. The findings also indicate that the Indian bank-centric financial sector has the potential for economic growth through credit transmission. Research limitations/implications - – The present study recommends appropriate reforms in financial markets to attain sustainable economic growth. The findings are useful for policy-makers who want to maintain a parallel expansion of financial development and growth. Originality/value - – To date, there are hardly any studies that use both market-based and bank-based indicators as proxies of financial development and analyze their role in economic growth in India. So, the contribution of the paper is to fill this gap in literature.

Keywords: India; Economic growth; ARDL; Financial development; G2; O16 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:sefpps:v:32:y:2015:i:3:p:340-356

DOI: 10.1108/SEF-10-2013-0152

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