Abstract:
The paper deals with finance-growth relationship across Indian states over
1980–2011 in panel cointegration and causality framework. We apply Engle–Granger
two-step procedure for cointegration test in panel setting which takes care of crosssectional dependence and heterogeneity across states. For panel Granger causality
analysis, we employ Dumitrescu and Hurlin (Econ Model 29:1450–1460, 2012)
method and apply bootstrapping to account for cross-sectional dependence. We find
robust evidence of cointegration between per capita income and credit per capita.
Using panel FMOLS, we find that 1 % change in credit per capita results in 0.14 %
change in per capita income. Panel Granger causality test reveals that there is bidirectional causality (feedback effects) in the absence of cross-sectional dependence.
However, with cross-sectional dependence, we find evidence in favour of supply
leading hypothesis. Probable policy implication calls for inclusive financial development and growth strategies in order to mitigate uneven income levels across states.
