Researching the relationship between Financial and Real sectors in India

The aim of the study is to empirically examine Schumpeter's view on finance and growth nexus in Indian setting. The study utilizes quarterly time series data for the period spanning from 1993: Q3 to 2013: Q2. After studying the construction of Indian financial system, both banking sector and stock market growth indicators are considered as the placeholder for financial sector growth. Nevertheless, real GDP growth is considered to represent the economic growth. Along with financial sector development and economic growth indicators, some control variables, namely; total government final consumption expenditure as a percentage of GDP, total trade as a percentage of GDP and inflation is applied as a control variable. Johansen maximum likelihood procedure of cointegration is employed to ensure the long run dynamics among the set of considered variables. Toda and Yamamoto (1995) Granger's Causality tests is applied to look into short-run causal relationship. The study concludes, Schumpeter's view on finance and growth nexus does not hold well in the context of Indian economy.