Causality between Financial Development and Economic Growth: Evidence from an Indian State

This study aims to examine empirically the relationship between Financial Development and Economic Growth and their causality in the context of Assam, a state in India. The method of Principal Component is employed to construct a financial depth indicator (IFD) that serves as a proxy of financial development in the study. Using time series techniques, the stationarity properties of the data sets are tested, followed by Johansen and Jesulius Cointegration analysis to examine long term relationship between the two variables. The study finds a cointegrating relationship between them. Further, Granger causality tests suggest that Financial Development causes Economic Growth in case of Assam. The impulse response function has been traced out for both the variables. It can be inferred from the study that, financial development in Assam needs to be plunged as it is an important channel through which economic growth nourishes.