Sachin Kumar
Published: 2014
Total Pages:
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The paper investigates the empirical link between financial development and economic growth in India. The major objective of this paper is to highlight the structural changes in the Financial Policies, which mainly comprises money and banking sector, during the reform policy promotes economic growth, and financial development and stability. The achievements of these objectives require that financial conditions are such that allocative efficiency is ensured. For this monetary policy should be supplemented by financial sector reforms. We examine theoretically and empirically the McKinnon-Shaw model in India. According to McKinnon, a basic complementarity exists between money and physical capital. The model predicts that a high real investment and promote economic growth. The view stands in sharp contrast with the Neo Classical and Keynesian view which contend that lowering the interest rate will stimulate investment and economic growth. Using time-series data for India for the period of 41 years (1971-2012) i.e. testing unit roots, Co-integration developed by Johanson & Jusilius (1991) and to detect the Causality and to short run and long run dynamics we use the VECM methodology. It traces the positive relationship empirically between Financial Development, GDP, real interest rates, nominal Deposit Rate, Trade Openness in India. Results support continued financial development with effective macroeconomic management. Therefore, this study concludes that policy measures for infrastructure improvements should be taken into account to make financial sectors more vibrant to invigorate economic growth.