Financial structure gap and economic development in India

Abstract

This study is built on the concept of optimal financial structure and examines its dynamics with the economic development process of India. Specifically, the present study intends to examine the evolving importance of banks and markets during different stages of economic development. Using annual data from 1988–2009 for India and selected benchmark OECD countries, we have conducted quantile and robust regression to assess the impact of deviation from the optimal financial structure on the output growth. To our knowledge the present study is one of the pioneer works in calculating the optimal financial structure in Indian context. The empirical evidence suggests that as the economy develops the services provided by banks are comparatively more important than those provided by the stock markets. The financial structure matters for the growth process. The deviation from the optimal structure has harmful effects on the economy and the financial structure gap retards the growth process.

Keywords:

• financial development
• financial structure
• economic growth
• principal component analysis
• quantile regression
• robust regression

JEL Classification:

• G1
• G2
• O16

Additional information

Notes on contributors

Pradeepta Sethi

Pradeepta SETHI is a research scholar pursuing his Doctoral degree at the National Institute of Financial Management (an autonomous Institute of Ministry of Finance, Government of India). His research interests are in the areas of financial systems, financial development, economic growth, international finance and corporate finance.

Brajesh Kumar

Brajesh KUMAR is an Assistant Professor (Economics) at National Institute of Financial Management (an autonomous Institute of Ministry of Finance, Government of India). He has more than 15 years of teaching, training, and research experience. He has also been Consultant to the Ford Foundation, UNESCO and the UGC-sponsored projects. Dr Kumar is a recognized resource person in the area of Data Analysis in Social Sciences Research using statistical and econometric software. He has been Asst. Editor to a monthly Magazine titled “Monthly Economic Digest”. He is Managing Editor to biannual periodical titled “NIFM Journal of Public Financial Management”. His areas of interest include mathematical economics, business economics, managerial economics, and computer applications in economics, research methodology and econometrics.