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Financial development, financial sector policies and growth: evidence from India

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This paper examines the dynamic relationship between financial development and economic growth in India. Using annual data from 1980 to 2014, we find evidence of a long-run relationship between financial development and economic growth. Financial sector policies embraced by the Government of India have enlarged the financial system, however we could not find substantial effect of these policies on the long-run growth process. Our causality test results show that the economic growth process exerts a uni-directional causal effect on the development of the financial system in India supporting the demand-following hypothesis.

Abstract

This paper examines the dynamic relationship between financial development and economic growth in India. Using annual data from 1980 to 2014, we find evidence of a long-run relationship between financial development and economic growth. Financial sector policies embraced by the Government of India have enlarged the financial system, however we could not find substantial effect of these policies on the long-run growth process. Our causality test results show that the economic growth process exerts a uni-directional causal effect on the development of the financial system in India supporting the demand-following hypothesis.

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