Financial development index and economic growth: empirical evidence from India

Abstract

PurposeThe purpose of this paper is to construct a financial development index (FDI) for the Indian economy and also examine the relationship between FDI and economic growth.Design/methodology/approachAugment Dickey Fuller, Phillips Perron and Ng Perron unit root tests are employed in order to determine the level of integration. The long‐ and short‐run dynamics are obtained by using auto‐regressive distributed lag approach to cointegration and rolling window approach to estimate coefficient of each observation.FindingsThe results indicate that long‐run relationship is presented among the economic growth, FDI, real‐interest rate (RIR), labor force and capital. But FDI negatively associated with economic growth in the case of long‐ and short‐run and RIR also negatively determine the economic growth only in the long run. The rolling regression result confirms that FDI negatively associated to growth in the years of 1978, 1979, 1984‐1987, 1990, 1996‐2000, 2004 and 2005 and RIR is impede economic growth in the years of 1978, 1979, 1986, 1988‐1997, 2001, 2002, 2006 and 2008.Originality/valueThe paper constructs an FDI for the Indian economy by using the four indicators of financial development. The findings are useful for India's policy makers in order to maintain the parallel expansion of financial development and economic growth.