The Nexus between Financial Development and Economic Growth in India: Evidence from Multivariate VAR Model

The paper examines the causal nexus between financial development and economic growth in India in a multivariate VAR model. The empirical analysis is based on cointegration and causality test. The cointegration test finds the presence of long run equilibrium relationship between financial development and economic growth. The Granger causality test finds the existence of bidirectional causality between money supply and economic growth, bank credit and economic growth, money supply and foreign trade, and market capitalization and foreign trade. It also confirms the unidirectional causality from market capitalization to economic growth, foreign trade to economic growth, money supply to market capitalization, bank credit to market capitalization, and money supply to bank credit. The study, however, does not find any causality between bank credit and foreign trade. The policy implication of this study is that financial development is considered as the policy variable to enhance economic growth and economic growth could be considered as the policy variable to generate financial development in the economy.