Banking, insurance and economic growth in India

Abstract

Purpose Understanding the role of financial intermediaries towards financial development and thereby the growth of an economy, this study aims to examine the long-run relationship between the development of banking and insurance sector and economic growth in India by covering different regimes including the regulated and the liberalized period. Design/methodology/approach For examining the long-run relationship between these sectors, the study uses VAR-VECM technique. Further, Granger causality test is used to check if there is the presence of any causal link among these sectors. Findings The findings clearly indicate long-run relationship between economic growth and the development of banking and insurance sector, while the causality results show demand following relationship in the complete period where there is bi-directional causality in the post-liberalized period from insurance to economic growth. Research limitations/implications As banking development is not found to support economic growth, this raises serious concerns towards the complex role of banks as against theory and demands further analysis to understand their role in an economy. Practical implications As causality pattern has changed from demand following to bi-directional causality, it is vital to understand the importance of liberalization towards the economic growth of the country as well as the contribution of insurance sector towards economic growth in the liberalized environment. Originality/value This is the first effort to empirically explore the relationship between economic growth and the development of banking and insurance sector in India by covering the complete period (regulated and liberalized).