The role of financial development in economic growth: empirical evidence from Indian states
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 21 September 2015
Abstract
Purpose
The purpose of this paper is to examine the relationship between financial development and economic growth in Indian states using annual data from 1993 to 2012.
Design/methodology/approach
The stationarity properties are checked by Levin-Lin-Chu and Im-Pesaran-Shin panel unit root tests. The study employed the Pedroni’s panel co-integration test to examine the existence of long-run relationship and the coefficients of co-integration are examined by fully modified ordinary least squares. The short term and long-run causality is checked by panel granger causality.
Findings
The co-integration test confirms a long-run relationship between financial development and economic growth for Indian states. The results support the supply leading hypothesis and highlight the importance of financial development in economic growth in Indian states. The findings also indicate that bank-centric financial sector of India has the potential of economic growth through credit transmission.
Research limitations/implications
The present study recommends for appropriate reforms in financial market to attain economic growth in India. The findings will be useful for India’s policymakers in order to maintain the parallel expansion of financial development and economic growth.
Originality/value
Till date, there is no study that includes all 28 states in analyzing the role of financial development in economic growth for Indian economy by applying latest econometric techniques. Further, the study uses gross domestic state product instead of net domestic state product as proxy for economic growth because of the presence of different depreciation rates.
Keywords
Acknowledgements
JEL Classification — G2, O16
Citation
Sehrawat, M. and Giri, A.K. (2015), "The role of financial development in economic growth: empirical evidence from Indian states", International Journal of Emerging Markets, Vol. 10 No. 4, pp. 765-780. https://doi.org/10.1108/IJoEM-05-2014-0064
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited