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Financial development and economic growth: empirical evidence from India

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  • Madhu Sehrawat
  • A K Giri

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.

Suggested Citation

  • Madhu Sehrawat & A K Giri, 2015. "Financial development and economic growth: empirical evidence from India," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 32(3), pages 340-356, August.
    • Handle: RePEc:eme:sefpps:v:32:y:2015:i:3:p:340-356
    DOI: 10.1108/SEF-10-2013-0152
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    Citations

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    Cited by:

    1. Chandrashekar Raghutla & Krishna Reddy Chittedi, 2021. "Financial development, real sector and economic growth: Evidence from emerging market economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6156-6167, October.
    2. Shahbaz, Muhammad & Hoang, Thi Hong Van & Mahalik, Mantu Kumar & Roubaud, David, 2017. "Energy consumption, financial development and economic growth in India: New evidence from a nonlinear and asymmetric analysis," Energy Economics, Elsevier, vol. 63(C), pages 199-212.
    3. Huaxi Yuan & Yidai Feng & Jay Lee & Haimeng Liu, 2020. "The Spatio-Temporal Heterogeneity of Financial Agglomeration on Green Development in China Cities Using GTWR Model," Sustainability, MDPI, vol. 12(16), pages 1-19, August.
    4. Rakesh Shahani & Aayushi, 2019. "Exploring Dynamic Linkages Between Inward FDI and India’s Economic Growth," Jindal Journal of Business Research, , vol. 8(2), pages 109-117, December.
    5. Iqbal, Athar & Khan, Muhammad Irfan & Riaz, Samina, 2017. "The Causality between Equity Market Development and Economic Growth: An Egg and Chicken Problem?," MPRA Paper 103038, University Library of Munich, Germany, revised 30 Dec 2017.
    6. Sin-Yu Ho & Bernard Njindan Iyke, 2017. "Determinants of stock market development: a review of the literature," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 34(1), pages 143-164, March.
    7. Kirikkaleli, Dervis, 2020. "The effect of domestic and foreign risks on an emerging stock market: A time series analysis," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    8. Rakesh Shahani & Aastha Bansal, 2021. "An Econometric Investigation of Dynamic Linkages Between CO2 Emissions, Energy Consumption, and Economic Growth: A Case of India and China," Jindal Journal of Business Research, , vol. 10(1), pages 107-127, June.
    9. Mohammad Mafizur Rahman & Istihak Rayhan & Nahid Sultana, 2023. "How Does Electricity Affect Economic Growth? Examining the Role of Government Policy to Selected Four South Asian Countries," Energies, MDPI, vol. 16(3), pages 1-17, February.
    10. Alexandra Horobet & Irina Mnohoghitnei & Emanuela Marinela Luminita Zlatea & Lucian Belascu, 2022. "The Interplay between Digitalization, Education and Financial Development: A European Case Study," JRFM, MDPI, vol. 15(3), pages 1-23, March.
    11. K. Siva Kiran Guptha & R. Prabhakar Rao, 2018. "The causal relationship between financial development and economic growth: an experience with BRICS economies," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 20(2), pages 308-326, October.
    12. Mansur, Alfan & Nizar, Muhammad Afdi, 2019. "Mengukur Perkembangan Sektor Keuangan di Indonesia dan Faktor – Faktor yang Mempengaruhi [Assessing the Measurement and Determinants of Financial Sector Development in Indonesia]," MPRA Paper 96265, University Library of Munich, Germany, revised 30 Sep 2019.
    13. Suman Dahiya & Manoj Kumar, 2020. "Linkage between Financial Inclusion and Economic Growth: An Empirical Study of the Emerging Indian Economy," Vision, , vol. 24(2), pages 184-193, June.
    14. Cher Chen & GholamReza Zandi Pour & Edwin R. de los Reyes, 2020. "Financial Development and Economic Growth in Asian Countries: A Panel Empirical Investigation," International Journal of Applied Economics, Finance and Accounting, Online Academic Press, vol. 6(2), pages 76-84.
    15. Jonathan A. Batten & Xuan Vinh Vo, 2016. "Bank risk shifting and diversification in an emerging market," Risk Management, Palgrave Macmillan, vol. 18(4), pages 217-235, December.
    16. Keneck-Massil, Joseph & Nomo-Beyala, Clery & Owoundi, Ferdinand, 2021. "The corruption and income inequality puzzle: Does political power distribution matter?," Economic Modelling, Elsevier, vol. 103(C).
    17. Ghulam Mujtaba Chaudhary & Zaheer Abbas & Jamshed Khurshid Meer, 2018. "Comparative Analysis Of Financial Systems In Context Of Global Financial Crisis," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 14(1), pages 95-109.
    18. Ghulam Mujtaba Chaudhary & Zaheer Abbas & Jamshed Khurshid Meer, 2018. "Comparative Analysis Of Financial Systems In Context Of Global Financial Crisis," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 14(1), pages 14-18.

    More about this item

    Keywords

    India; Economic growth; ARDL; Financial development; G2; O16;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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