The Nexus between Finance, Growth and Poverty in India: The Cointegration and Causality Approach1

Abstract

The paper examines the causal nexus between financial development, economic growth and poverty reduction in India during 1951-2008. The empirical analysis is based on cointegration and causality test. The cointegration test finds the presence of long run equilibrium relationship between financial development, economic growth and poverty reduction. The Granger causality test at the end confirms the presence of unidirectional causality from poverty reduction to economic growth, economic growth to finance development, financial development to poverty reduction and economic growth to poverty reduction. It also finds no causality between finance development and economic growth, and poverty reduction and finance development. The paper suggests that economic growth is considered as the policy variable to accelerate finance development and both could be used as the policy variable to reduce poverty in the economy.