Financial development and economic growth: empirical evidence from India

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.

Openness of the Economy, Diversification, Specialization, and Economic Growth

“…Furthermore, Alfaee and Al-Jafari (2015) found a shortterm causality from financial development to trade openness. Sehrawat and Giri (2015) showed a long-term relationship between financial development and growth using a cointegration test. If developing countries keep their own economic structures as they presently exist, the economic divide between advanced and developing countries seems likely to expand.…”

Revisiting endogeneity among foreign direct investment, economic growth and stock market development: Moderating role of political instability

“…5 However, the current study reviews only those studies, which focuses on developing and emerging country, to understand the nature of the relationship between capital market of a country and its economic growth. The research in the context of developing and emerging economies has also documented mixed findings, namely: unidirectional (inter alia: Ang & McKibbin, 2007;Brambila-Macias & Massa, 2011;Sehrawat & Giri, 2015;Yildirm et al, 2013), bidirectional (inter alia: Calderona and Lin, 2003;Hassan, Sanchez, & Yu, 2011;Jalil et al, 2010;Yildirm et al, 2013;Yousif, 2002), and no-relationship (inter alia: Nain & Kamaiah, 2014; Sahu & Dhiman, 2011). On the contrary, Pan and Mishra (2016) reported a long-run negative association with the real sector of the economy with China's A share market using ARDL model, which according to the authors is a proof of existence of irrational prosperity on the stock market and the bubbles in China's financial sector.…”

“…This study has several theoretical and practical contributions. Firstly, the extant studies on the nexus among FDI, economic growth, and stock market development have been well documented in the context of both developed and emerging economies (inter alia: Duca, 2007;Jalil, Wahid, & Shahbaz, 2010;Levine & Zervos, 1998;Levine 2005;Yildirm, Ozdemir, & Dogan, 2013;Yousif, 2002), whereas a very little attention has been given to South Asian countries (inter alia: Sehrawat & Giri, 2015). Therefore, this study contributes to the literature by investigating this relationship focusing on a South Asian developing economy, Bangladesh.…”

“…Thirdly, studies on the effects of political instabilities on economic performances have ignored the moderating role of political instability on the relationship between economic growth and stock market development, relationship between economic growth and FDI, and relationship between FDI and stock market development (inter alia: Ahmed & Pulok, 2013;Aisen & Veiga, 2013;Alesina & Perotti, 1996;An et al, 2016;Asteriou & Siriopoulos, 2000;Brada et al, 2006;Liu et al, 2017;William, 2017). Similarly, the existing empirical studies mainly focused on the endogenous relationship among economic growth, FDI, and stock market development, whereas, the moderating effect of political instability on these relationships has been given less attention (inter alia: Ang & McKibbin, 2007;Bengoa & Sanchez- Robles, 2003; Brambila-Macias & Massa, 2011;Bristy, 2014;Calderona & Lin, 2003;Chakraborty & Basu, 2002;Handa & Khan, 2008;Haque & Fatima, 2011;Hassan, Sanchez, & Yu, 2011;Hsiao &Hsiao, 2006;Iamsiraroj, 2016;Jalil et al, 2010;Li & Liu, 2005;Masuduzzaman, 2014;Nain & Kamaiah, 2014;Pan & Mishra, 2016;Rahman, 2015;Raza & Jawaid, 2014;Raza, Jawaid, Afshan, & Abd-Karim, 2015;Sahu & Dhiman, 2011;Sehrawat & Giri, 2015;Soumare & Tchana, 2015;Uddin, Shahbaz, Arouri, & Teulon, 2014;Uddin et al, 2014;Freckleton, Wright, & Craigwell, 2012;Yildirm, Ozdemir, & Dogan, 2013;You...…”

Financial Development and Economic Growth: Additional Evidence from Ghana

“…Following Simwaka et al [13], and Sehrawat and Giri [22], the study specified the general finance-growth nexus as:…”