Does life insurance activity promote economic development in India: an empirical analysis

Abstract

PurposeThe role of financial institutions and financial intermediaries in fostering the economic growth by improving the efficiency of capital accumulation, encouraging savings and ultimately improving the productivity of the economy has been well accepted by now. Recent studies show that the insurance industry can improve the economic growth through financial intermediation, risk aversion and generating employment. This study aims to find the relationship between life insurance industry and economic development in India.Design/methodology/approachThe study uses the VAR‐VECM model to find out the long run and short run relationship (if any) between life insurance growth and economic growth along with Granger causality test to suggest any causal relationship.FindingsThis study finds that there is long term relationship between life insurance industry and economic development in India. And the Granger causality test suggests that life insurance sector improves the overall economic development in India and the reverse is not significant.Research limitations/implicationsThe only limitation to study the relationship between life insurance sector development and economic development is the data set which has been used is annual data as the quarterly data were not available for insurance industry.Practical implicationsThe study documented the long run relationship between life insurance industry and economic development in India and finds that the life insurance sector improves the overall economic development in India. This would help us to understand the implications of the life insurance market development in the post reform era.Originality/valueThere is a dearth of literature on the Indian economy in relation to the insurance sector, specifically the life insurance sector. This is the first attempt to study the impact of life insurance development on Indian economy after the reforms initiated in the insurance sector.