Financial development and economic growth: empirical evidence from India

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.

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.

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.

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.

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.