Growth-finance nexus: Empirical evidence from India

The relationship between financial development and economic growth has attracted considerable attention of policymakers and researchers alike. The present study aims to empirically examine the relationship between economic growth and financial development in the post-reform period, from 1992-1993 to 2014-2015. The period witnessed reforms towards financial liberalisation like deregulation of interest rates, lowering reserve requirements, removal of financial markets imperfections and the development of an efficient and sound financial sector. The indicators of financial development used in the study are Broad money to GDP ratio, Stock market capitalization to GDP ratio and Traded Value ratio. The study employs Johnson co-integration technique and finds long run relationship among the variables. Multivariate Granger causality test finds market capitalization and traded value ratio together granger cause GDP, and market capitalization and broad money together granger cause GDP. Also, the study finds causality running from GDP and traded value ratio to market capitalization. The results, therefore, indicate considerable interdependence among economic growth and financial development in the post reform period under study.