Role of Finance in Economic Growth in India: An Emperical Analysis

  • Sachin Kumar Research Student, Department of Economics, Indira Gandhi National Open University (IGNOU), New Delhi, India

Abstract

This paper has examined the impact of the financial development on economic growth in India in the post-reform period by using quarterly data for the period 1991 to 20015 for India. The study used ADF and PP test to check the stationary among the variables. Because most of the financial variables are highly volatile by nature, if the study conduct direct regression in high volatility data the result may be spurious and unexpected. So the study conducted stationary test and found variables financial development i.e., M3/GDP and growth rate are integrated at level and significant I (1) at 5% level. Secondly, for the purpose of finding long run relationship co-integration vector we have used Johnsoen and Jesulisu (1991). The sign of coefficient of M3/GDP is positive a priori expectations. India has the positive impact of financial development. It shows that financial development is playing a significant role in the economic growth in India. The co-integrating relationship supports the existence of long run equilibrium relationship among the variables in the context of India. We also report the Granger causality to support our findings, which support the hypothesis of Finance-Led Growth in India. Here the study concludes that, the financial development is more helpful in long run growth and as one of the long run determinants of economic growth, not vice-versa. An increase in the money market rate of interest has a positive significant effect on economic growth.

Key Words: Financial Development, Reforms, Economic Growth, Co-Integration, Causality.

JEL Classification: E41, E43, G221

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Published
2018-08-16
Section
Articles