The paper investigates dynamic relationship between physical infrastructure, financial development and economic growth in the case of India, using an Autoregressive Distributed Lag (ARDL) and Toda-Yamamoto (T-Y) causality approach for the period 1980 to 2016. Physical infrastructure index and financial development index are constructed using Principal Component Analysis method. Empirical results suggest that physical infrastructure has a positive effect on economic growth both in the long run and short run, whereas financial development, though significant, has a weak impact on economic growth. The causality test supports a bi-directional causal relationship between infrastructure development and economic growth, while it finds a unidirectional causation running from economic growth to financial development. It also finds that gross investment, employment have a positive, and inflation has an adverse effect on economic growth. As India is aiming for higher growth for a sustained period, our results suggest that there is a need for Government intervention in expanding the physical infrastructure and this, in turn, could lead to growth of the financial sector in the country.

 

Keywords: Infrastructure Index, Financial Development Index, Economic Growth, ARDL Approach, India

JEL Classification codes: H40, C43, O40, C32