The relationship between financial development indicators and human development in India

Abstract

Purpose– The purpose of this paper is to examine the relationship between financial development indicators and human development in India using annual data from 1980-2012.Design/methodology/approach– The Ng-Perron unit root test is used to check for the order of integration of the variables. The long run relationship and short run dynamics are examined by implementing the ARDL bounds testing approach to co-integration. Granger’s non-causality test and variance decomposition techniques are also used to examine the impact of financial development indicators on human development.Findings– The results confirm a long run relationship among the variables. The results of granger non causality indicate that unidirectional causality runs from financial development indicators to human development index (HDI). The variance decomposition analysis shows that among all the financial indicators, broad money supply (M3) has the largest contribution to changes in human development in India.Research limitations/implications– The present study recommends for appropriate reforms in financial market to attain sustainable human development in India. The findings will be useful for India’s policy makers, in order to maintain the parallel expansion of financial development and human development.Originality/value– This paper is first of its kind to empirically examine the casual relationship between financial development indicators and human capital development proxied by HDI in India by using modern econometric techniques.