A Study of Financial Development in India: A Comprehensive Approach

Abstract

Financial sector development is one of the crucial requirements for the economic growth and development of a country. The financial sector is multifaceted in nature with several dimensions to its development be it in terms of access to finance, depth of the financial sector vis-à-vis the real economy, efficiency with which financial services are provided, and its resilience in times of crisis. This forms a 4 x 2 conceptual framework of financial sector development comprising four dimensions, namely, access, depth, efficiency and stability across two components of the sector, viz., financial institutions and financial markets, developed by the World Bank. Each dimension of financial development comprises a vast array of indicators. India made concerted efforts to liberalize its financial sector along with the economic reforms introduced in 1991. While financial development of India has been captured by several studies as in the case of cross-country comparison studies or in India-specific studies, most of the research work is with reference to a single year for country-comparisons or extend to a few years. No study is found that traces the long term development of the financial sector of India encompassing its varying dimensions. With this premise, the present study proposed an Index for a comprehensive measurement of the financial sector development in India over a long period. The Index of Financial Development (IFD) was constructed to measure the overall development of the financial sector by creating a pyramid structure of primary, secondary, and tertiary level indices. The study used the dimensions of both financial institutions as well as financial markets for inclusion in the index. The index was constructed for a 20-year period from 2001-2020, based on the availability of data. The indices showed continuous improvement in financial development and was found to be positively associated with economic growth.