Dynamics of Financial Development and Economic Growth: Panel Data Analysis for Selected Indian States

Abstract

With the help of standard refined panel analysis techniques the present study analysed the dynamics of causal relationship between financial development and economic growth for selected Indian states. Mainly focusing on banking level indicators the present attempt measured the extent of financial development in the selected Indian states. Three major econometric techniques including panel unit root tests, cointegration tests and finally the panel error correction model have been implemented for identifying the relationship between variables. Firstly, the series was tested for cross-sectional independence and then checked for the presence of unit roots. The results of both first and second generation unit root indicated an integration of order one for all the variables and a long-run relationship between financial development and respective economic growth indicators was confirmed by the Pedorni's and Westerlund's cointegration tests. The results of the present study emphasized on the critical role of credit provided by banks in the process of long run economic growth across states. Apart from this the results of the study highlighted a very relevant fact that the Indian economy has a lot of scope in harvesting the less financially developed areas of the states which can run rapidly on the greeny path of dynamic and sharp long term sustainable economic growth. K e y w o r d s: causality; economic growth; financial development; panel data; unit root. J E L Classification: G21; C23; O40.