Financial Development and Economic Growth in India : A Study in the Presence of Endogenous Structural Breaks

This study examines the long-run relationship between the financial development, investment and economic growth for the Indian economy during the period from 1971-72 to 2010-11 by applying Lee and Strazicich (2003 and 2004) unit root test that allows for endogenously determined structural breaks in the series, Gregory and Hansen (1996) cointegration technique that also allows for endogenously determined structural breaks in the relationship and Autoregressive Distributed Lag (ARDL) model of Pesaran and Shin (1999). The empirical results indicate that financial depth, measured as ratio of total bank deposit liabilities to lagged GDP, share of investment in GDP, and real deposit rate have a long-run equilibrium relationship with both economic development measured by real GDP and its one period relative growth rate. However, the relationship between financial depth and economic growth is found to be insignificant. In other words, the estimated results support the view of Lucas (1988) that financial development does not matter for economic growth