Department of Economics, Central University of Rajasthan, Ajmer, Rajasthan, India
*Corresponding author: sharma.jaishree1996@gmail.com (ORCID ID: 0009-0004-6540-947X)
Online published on 7 May, 2025.
The primary aim of this study is to analyze the impact of financial development and governance in India on environmental quality within the time frame of 1998 to 2021.
The present study utilizes Principal Component Analysis (PCA) as a method for constructing an index that encompasses the factors of financial development and governance. Subsequently, the long-run association and direction of causality (short-run and Long-run) among the Environmental Quality(EQ), Financial Development (FD), and Good Governance (GOV) have been explored using Johansen-Juselius (JJ) cointegration test and Granger causality under the VECM framework respectively.
The empirical data support long-term cointegration among variables using the Johansen-Juselius (JJ) cointegration test. VECM-based Granger causality analysis shows a unidirectional positive causal link between FD and EQ. However, increasing GOV decreases carbon emissions, which increases EQ. This discovery revolutionizes carbon emissions research.
The unique notion of green financial development may solve this problem. Green project investment may change outcomes. Good governance can strategically promote financial development and environmental quality through a strong regulatory framework, incentive mechanisms, education, and corruption prevention. In CSR, Indian companies must prioritize environmental responsibility and sustainable practices. Environmental enforcement agency capacity must be increased. Environmental policy benefits from good governance and transparency.
The current study contributes to the existing corpus of research by constructing a comprehensive Index of Financial Development and Governance which has not been attempted before. The impact of financial development on environmental quality in India has not been extensively investigated in earlier academic research, particularly in relation to the role of governance.
⓿ Numerous impediments exist in the accuracy of capturing multi-faceted outlook of financial development.
⓿ The current study assesses the diversity of financial development by creating distinct indices for different components that aid in the study.
⓿ A unidirectional and positive causal link was observed between the FD and EQ through the VECM- based Granger causality analysis.
Financial development, Governance, Carbon emission, Principal Component Analysis (PCA), VECM model
