Financial Development and Economic Growth in India: Long-Run Dynamics and Policy Implications for Viksit Bharat 2047

Abstract

This study examines the relationship between financial development and real economic growth in India in the context of the Viksit Bharat 2047 vision. Quarterly secondary data covering April 2011 to March 2025 (56 observations) are used to evaluate Real GDP alongside three channels of financial development: Non-Food Bank Credit, market capitalization, and Foreign Direct Investment (FDI). The empirical strategy combines the Augmented Dickey-Fuller test, Ordinary Least Squares regression, Johansen cointegration, a Vector Error Correction Model (VECM), and pairwise Granger causality tests. All four series are non-stationary at level and stationary after first differencing, supporting an I(1) time-series framework. The Johansen trace statistics indicate long-run cointegrating relationships among the variables. The estimated error-correction coefficient for GDP is -0.28 (t = -3.92), implying that approximately 28% of a disequilibrium is corrected within a quarter. Granger-causality results show predictive precedence from bank credit to GDP (p = 0.01) and from FDI to GDP (p = 0.04), whereas market capitalization does not predict GDP at the 5% level (p = 0.07); GDP, however, predicts market capitalization (p = 0.03). The findings suggest that the composition and productive allocation of finance matter as much as its scale. For the Viksit Bharat 2047 agenda, policy should emphasize productive credit, capital-market depth linked to real investment, and stable long-horizon FDI. The study also cautions against interpreting rapid financial expansion as growth-enhancing in every circumstance and highlights the need to keep financial deepening aligned with real-sector capacity.