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Financial Deepening—Growth Nexus in South Africa and India: An Evidence from Cointegration and Causality

In: Analytical Issues in Growth & Structural Change, Macroeconomy, Security, and Sustainability of India's Economic Development

Author

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  • Mahendra Pal

    (University of Delhi, Department of Commerce, Delhi School of Economics)

Abstract

The chapter examines the long-run and causal relationship between financial deepening and economic growth in South Africa and India with the help of new time series methodology for the period of 52 years (1971–2023). We attempt to discuss the theory of financial repression and liberalization and its application in South Africa and India; both countries are highly developing, emerging, and leading economies of BRICS. The financial sector reforms adopted by the South African economy in 1985 and Indian economy since 1991 onwards appear to be based on the theoretical backdrop of McKinnon-Shaw (1973) theory of financial liberalization. Further, the chapter analyzes the trends of GDP growth rate and financial deepening in South Africa and India. The study infers that financial deepening is not co-integrated with economic growth in South Africa and shows no long-run relationship, but in India both the variables are co-integrated and find long-run relationship and significant at 5% level. Granger causality results also show the difference in the direction of causality. In South Africa causality runs from growth to finance, which supports the hypothesis of Demand-Led Growth, while in India causality runs from finance to growth, which supports the hypothesis of Supply Led Growth. Further, our results are supported by the VECM, IRF and VDC. The paper finds that the liberalized financial system has not been able to increase effective growth rates in South Africa, while it has a proven record in India. Hence, we suggest further improvement in money and capital markets in South Africa through appropriate regulatory and macroeconomic policies. Indian programs of successful financial deepening and growth nexus should be the guide for the improvement in the financial system of South Africa and other SSA countries. India, with its sound financial system, is an ideal case study for South Africa. Our findings regarding South Africa are consistent with the results of Odhiambo (2010).

Suggested Citation

  • Mahendra Pal, 2026. "Financial Deepening—Growth Nexus in South Africa and India: An Evidence from Cointegration and Causality," India Studies in Business and Economics, in: Biswajit Chatterjee & Asim K. Karmakar (ed.), Analytical Issues in Growth & Structural Change, Macroeconomy, Security, and Sustainability of India's Economic Development, pages 133-159, Springer.
    • Handle: RePEc:spr:isbchp:978-981-95-5242-9_8
    DOI: 10.1007/978-981-95-5242-9_8
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables

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