Financial Development and Economic Growth: Evidence from Indian Economy

Abstract

This paper examines the relationship between financial development and economic growth in India from 1970-71 to 2008-09. Using a multi-variable VAR model, the competing hypothesis of supply-leading versus demand-following hypothesis is tested empirically. The results from Johansen and Juselius co integration test supports for the existence of long run equilibrium relationship exist among variables of financial development and economic growth for Indian economy. Further, the results from Granger causality tests based on vector error-correction models (VECM) suggests unidirectional causality running from financial development to economic growth. This result supports the supply leading hypothesis for Indian economy during the sample period. This finding highlights the importance of financial development in India’s recent growth.