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

Published By: National Institute of Public Finance and Policy Ne | Published Date: December, 05 , 2018

The paper investigates dynamic relationship between physical infrastructure, financial development and economic growth in the case of India, using an Autoregressive Distributed Lag (ARDL) and Toda-Yamamoto (T-Y) causality approach for the period 1980 to 2016. Physical infrastructure index and financial development index are constructed using Principal Component Analysis method. Empirical results suggest that physical infrastructure has a positive effect on economic growth both in the long-run and short-run, whereas financial development, though significant, has a weak impact on economic growth. The causality test supports a bi-directional causal relationship between infrastructure development and economic growth, while it finds a unidirectional causation running from economic growth to financial development. It also finds that gross investment and employment have a positive, and inflation has an adverse effect on economic growth. 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 the growth of the financial sector in the country.

Author(s): Ranjan Kumar Mohanty, N. R. Bhanumurthy | Posted on: Jan 11, 2019 | Views() | Download (40)

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