Trade, Financial Development and Economic Growth Nexus in the Globalize India

The paper examines cointegration and causality between internationalization of trade, financial development and economic growth in India during the globalization era of 1990s, using the monthly data over the period 1994-2010. The analysis is based on cointegration test advanced by Johansen (1991) and Causality test advanced by Granger (1988). The Johansen’s test suggests that there is long run equilibrium relationship between internationalization of trade (exports and imports), finance development (market capitalization and money supply) and economic growth (index of industrial production). The Granger causality test confirms the bidirectional causality between economic growth and internationalization of trade (for both exports and imports) and financial development (money supply only). It also finds a unidirectional causality from financial development (market capitalization only) to internationalization of trade (exports only) and economic growth. Based on the empirical findings, the paper suggests that India should go for more internationalization of trade and financial development to enhance economic growth. The continuation of such policies with sustained economic growth is also very desirable for faster internationalization of trade and financial development.