Financial Sector Development and Economic Growth in India: Some Reflections

Financial systems play a crucial role in the economic development of a country. There is sufficient economic literature which reveals that a well functioning financial system increases economic efficiency, investment and growth. This paper provides a snapshot of the evolution of Indian financial system along with its progress and performance by making use of various proxy variables of financial development. It also attempts to examine the the relationship between the financial development and growth in Indian context. By using time series data from1991-91 to2012-13 period and using three proxy variables viz.GDP per capita for economic growth of India, M2 to GDP ratio and ratio of stock market capitalization to GDP for measuring the extent of financial deepening in India and utilizing regression technique, the empirical findings very clearly point towards the existence of strong relationship between financial deepening(FD) and EG. The paper also shows the extent of financial deepening of markets in India vis-a vis other Asia Pacific economies. The analysis reveals that the Indian financial sector has undergone far reaching changes over three and half decades as a result of financial sector reforms. Consequently, the widening and deepening of financial system has allowed greater and more productive investment to occur. Financial intermediation has increased over time, which in turn is leading to a virtuous cycle of higher savings, improved investment efficiency and higher real economic growth. However, there are several challenges in the financial sector in the form of increasing non-performing assets (or bad loans) of the banks and underdeveloped corporate bond market. These challenges need attention and require policy intervention.