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Financial Development and Economic Growth in India


  • Indrani Chakraborty

    (Indrani Chakraborty is at the Institute of Development Studies Kolkata (IDSK), DD-27/D, Salt Lake City, Kolkata 700064. Email:


This article examines the impact of the developments in the financial sector on economic growth in India in the post-reform period. The model of Mankiw et al. (1992) was extended to establish a relationship between financial development and economic growth. The model was then estimated using quarterly data for the period 1993 to 2005 for India, using the techniques of cointegration and vector error correction method. Cointegration results show that capital–output ratio and rate of growth of human capital have positive effects on real rate of growth of GDP, irrespective of the indicator of stock market development. An increase in the market capitalization dampens economic growth, whereas turnover has no significant effect, and an increase in the money market rate of interest has a positive effect on economic growth. Real wealth, debt burden, real effective exchange rate and the rate of growth of labour have negative effects. Vector error correction method shows that the ECM term relating to market capitalization and inflation help adjust short-run dynamics of economic growth when we use market capitalization as the indicator of the stock market development. The findings lend no support to the theoretical prediction that the stock market development would play an important role in enhancing economic growth in India. On the contrary, reform measures on the market rate of interest that were introduced in the Indian banking system appear to have promoted economic growth significantly.

Suggested Citation

  • Indrani Chakraborty, 2010. "Financial Development and Economic Growth in India," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 11(2), pages 287-308, September.
  • Handle: RePEc:sae:soueco:v:11:y:2010:i:2:p:287-308

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    6. Sanjaya Kumar LENKA, 2015. "Does Financial Development Influence Economic Growth in India?," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(605), W), pages 159-170, Winter.
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    8. Tanzeem HASNAT & Shahid ASHRAF & Umer J. BANDAY, 2016. "Growth-finance nexus: Empirical evidence from India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(608), A), pages 319-330, Autumn.
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    More about this item


    Financial development; economic growth; India; banking sector; stock market; JEL: F43; JEL: G21; JEL: O16;

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance


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