A Causal Study of Finance and Productivity in India

Economic progress is a very complex process. Researchers have identified certain key factors that affect it, of which finance is one. In recent years, there have been studies using econometric time-series analysis to study the short-run and long-run relationships between finance and growth. This paper is a study of the Indian economy, where the causal relationship between finance and productivity is studied. Data from 1989 to 2012 for the Indian economy has been used for this study, and tests of cointegration, causality and error-correction are run. The results suggest that finance leads to productivity. However, an increase in productivity may not increase overall financial availability in the economy. It does lead to an increase in the amount of bank credit that is provided to industry. In other words, there is unidirectional causality from bank credit to growth; and from growth to industrial credit. There is also unidirectional causality from stock market turnover to growth, but not the other way round. Stock market capitalization doesn't have any relationship with productivity