India’s Finance-Growth Nexus: VECM Cointegration and Causality Analysis with Income Inequality and Globalization
This paper examines the relationship between financial development and economic growth in India taking the weakly exogenous variables of income inequality, trade openness and financial openness together with the structural break dummy into the co-integration analysis of the vector error correction model (VECM). Implementing the Granger causality tests we find out that both financial size and financial efficiency exhibit a negative impact on economic growth with no feedback from the latter to each of the former. It is important for policy makers to recognize that finance does not always promote economic growth, considering how to convert the effect of financial development from “growth-retarding” to “growth-enhancing”.
Keywords - India, Finance-growth nexus, Income inequality, Globalization