Nexus of financial development and economic growth in India: Revisiting Schumpeter

The study focuses to examine the nexus of financial development and economic growth in India. Despite of multiple views on this nexus all schools of economic thought acknowledged the role of finance as a facilitator in the economic system. The current study uses the functional approach to finance growth nexus in which financial development reduces market frictions via transaction and information cost in the economy. The study utilizes annual time series data for the period spanning from 1988 to 2011. The Fully Modified Ordinary Least Square (FMOLS) and Johansen Maximum Likelihood procedure of cointegration techniques are utilized to examine the long-run equilibrium dynamics among financial development and economic growth indicators. Toda and Yamamoto (1995) Granger's Causality tests was applied to look into the short-run causal relationship. The major findings of the study suggest that Schumpeter's view on finance and growth nexus does not keep good in the context of Indian economy.