Financial intermediation and economic growth: the post-liberalization Indian experience

Abstract

The paper is concerned with the relationship between economic growth and financial intermediation, in particular stock market development, in post-liberalization India. It identifies three possible relationships: (a) the relationship between growth of manufacturing and growth of the stock market; (b) the relationship between growth of the stock market and growth of traditional financial intermediaries like banks; (c) the relationship between the growth of the primary stock market and that of the secondary stock market. These three relationships are empirically tested using Indian data. While the growth of turnover in the stock market is found to be positively correlated with the change in the growth of manufacturing and the growth of sales of new shares is found to positively affect the secondary market, evidence on the relationship between sales of new shares and traditional banking activities is mixed. The primary stock market is found to crowd out bank deposits, but crowd in bank credit.

Keywords:

• growth
• financial intermediation
• Indian stock market

JEL classification:

• E44
• O43
• O53

Acknowledgements

The paper is based on the author's MSc dissertation submitted to the University of Essex. Guidance and encouragement from Professor John Nankervis is most gratefully acknowledged. The author also thanks Professor Parantap Basu and seminar participants at Durham and IDSK as well as an anonymous referee of this journal for useful comments. Errors and omissions that may have remained are, however, the author's own responsibility.

Notes

1. Non-food credit is total credit minus the credit advanced for storage of food grains by individuals and agencies.

2. For turnover we have taken the current value instead of a past 12-month average.