Analyzing the Dynamic Relationships between Physical Infrastructure, Financial Development and Economic Growth in India

Abstract

This paper investigates the dynamic relationships between physical infrastructure, financial development and economic growth in the case of India, using the autoregressive distributed lag and the Toda-Yamamoto causality approach for the period 1980 to 2016. A physical infrastructure index and a financial development index are constructed using the principal component analysis. The empirical results suggest that physical infrastructure has a positive effect on economic growth both in the long run and short run, whereas financial development, although significant, has a weak impact on economic growth. The causality test supports a bidirectional causal relationship between infrastructure development and economic growth, while it finds unidirectional causation running from economic growth to financial development. As India is aiming for higher growth for a sustained period, our results suggest that there is a need for government intervention in expanding the physical infrastructure and this, in turn, could lead to economic growth as well as financial sector development.

Interactions among Infrastructure, Trade Openness, Foreign Direct Investments and Economic Growth in India

“…In other words, higher economic growth is driven by the development of infrastructure areas while greater development in infrastructure areas has also resulted significant economic growth in India. This finding is consistent with Pradhan et al (2013) and Mohanty and Bhanumurthy (2018) who found the presence of bi-directional causality between economic growth and physical infrastructure in Indian context and also with the study by Chi and Baek (2016) showing feedback relationship between transport infrastructure and economic output in the U.S. economy. On the other hand, this finding contrasts with Sahoo and Dash (2009) who found only a unidirectional causation from infrastructure development to output growth in case of India and Sahoo et al (2012) in the context of China, and Tong, Yu and Roberts (2014) who found a unidirectional causation from economic growth to transport infrastructure in the U.…”

“…Where, INFI denotes infrastructure development index, TOI is trade openness index and IFA denotes inflation rate which drifts at a high level during most part of the study period affecting the economic productivity in India. Following Barro (2013) and Mohanty and Bhanumurthy (2018), inflation rate is included in the empirical model. Taking the natural logs of both sides of Equation (2) results the following estimable function (Equation 3): …”

“…Theoretical literature reveals that infrastructure development/investment is a key pre-condition to foreign direct investment (FDI), trade openness and economic growth in any economy. But the relationship between infrastructure development and economic growth has been controversial and several empirical studies examining this issue have found high returns to infrastructure development/investment (Alwafi 2017; Aschauer 1989; Asiedu 2002; Chi and Baek 2016; Mishra, Kunapareddy and Kar 2013; Mohanty and Bhanumurthy, 2018; Sahoo and Dash 2009; Sanchez-Robles, 1998); while, another group of studies provide the evidence that infrastructure development/capital has an insignificant (little impact) or no effect (or mixed effects) on economic growth and productivity (Berechman, Ozmen and Ozbay 2006; Chandra and Thompson 2000; Ewing 2008; Garcia-Mila, McGuire and Porter 1996; Holtz-Eakin and Schwartz 1995; Tatom, 1993). Furthermore, besides mixed effects of infrastructure on economic growth, the direction of the causal relationship between infrastructure and economic growth, remains vague (Olarreaga 2016).…”

Investigating the Roles of Physical Infrastructure, Financial Development and Human Capital on Economic Growth in Bangladesh

“…Sahoo and Ranjan Kumar (2009) studied the impact of physical infrastructure on growth in the context of India. Along with physical infrastructure, Mohanty and Bhanumurthy (2018) considered financial development while analysing their influence on economic growth. In the context of Bangladesh, Sharif (2013) and Rahman (2007) separately probed into the effect of human capital and financial development, respectively, on growth.…”

Does Transport Infrastructure Fosters the Economic Growth: An Asean Perspective

“…In the last part of this section, different alternative approaches signifying infrastructure for development of economy have been mentioned. The focus of Mohanty and Bhanumurthy (2018) was on the development and maintenance of infrastructure and its influence on the development of economy and government quality. The findings revealed that infrastructure benefits are greater than its costs.…”