The Dynamics of Cointegration Between Economic Growth and Financial Development in Emerging Asian Economy: Evidence from India

Abstract

The present article examines the relationship between economic growth and financial development in the context of Indian economy over the period of 15 years from June 2003 to February 2018. The study employs cointegration test, involving Johansen Juselius Cointegration and autoregressive distributed lag (ARDL) Bounds test approach to ascertain the long-run relationship between financial development and economic growth. The study further employs fully modified ordinary least squares—OLS—(FMOLS), dynamic OLS (DOLS) and canonical cointegration regression (CCR) models to ascertain the sensitivity and robustness of the estimates derived from ARDL Bounds test approach. The stability of the models employed in the study are further confirmed by rolling window analysis and the cumulative sum (CUSUM) and cumulative sum of squares (CUSUMSQ) tests. The outcome of the article reports the existence of long-run equilibrium relationship between economic growth represented by Index of Industrial Production and Financial Development represented by the Bombay Stock Exchange (BSE) Index and BSE Volume of Trade. The article also involves consumer price index as proxy for inflation, exchange rate, ratio of export to import and weighted average call rate as control variable to also examine their impact on the Indian economic growth. The study confirms the existence of Supply Leading Hypothesis, that is, existence of unidirectional causality running from financial development to economic growth in the Indian economic scenario. The outcome of the article indicates the positive and significant influence of development of financial markets represented by stock market on the economic growth.

Financial Development: The Role of GDP per Capita Dynamics in Low- & Middle-Income Economies

“…The supply-leading hypothesis suggests that financial development drives economic growth, indicating a unidirectional causality from finance to economic growth. For instance, Tripathy and Mishra (2021) confirmed the supply leading hypothesis, showing unidirectional causality from financial development to economic growth in the Indian economy. The demand-following hypothesis presents an alternative viewpoint to the supply-leading hypothesis.…”

“…As businesses flourish and the economy prospers, the demand for financial products such as loans, investments, and insurance rises, prompting financial institutions to expand to meet these growing needs. Moreover, economic growth often leads to higher incomes and accumulated wealth for individuals and households, encouraging greater saving and investment activity, thus boosting the demand for financial services (Tripathy & Mishra, 2021). Furthermore, the improved economic climate can stimulate a heightened risk appetite, motivating people to seek investment opportunities and financial products that offer potentially higher returns.…”

The Dynamic Relationship Between Financial Development, Economic Growth, Foreign Direct Investment and Trade Openness: Evidence from South Asian Countries

“…Boachie et al (2020) using ARDL estimation technique from 1960–2013 found that financial development and trade openness has encouraged private sector investment in India. Tripathy and Mishra (2021) looked into the connection between financial development and economic growth for India from 2003 to 2018. The study’s findings point to a long-term connection between financial development and economic growth.…”

Impact of Covid-19 on Long Run and Short Run Financial Integration Among Emerging Asian Stock Markets

“…But India's global ascendancy across the economic landscape of the world led to financial integration of Indian market with other developing and emerging nations also. Many studies (like Sehgal et al, 2019;Kumar & Aurora, 2020;Tripathy & Mishra, 2021) tried to explore the possibility of financial integration of Indian market with selected emerging markets. But unfortunately, researchers could not get any consensus.…”