Finance and growth: Evidence from South Asia

Abstract

The article examines the empirical relationship between financial development and economic growth for five South Asian countries over the time period 1990–2015, using both panel model approach and time series analysis. We employ multiple proxies for financial development, namely, foreign direct investment, total debt service, gross domestic savings, domestic credit to private sector by banks, and domestic credit provided by financial sector to test the relationship. The panel model approach results indicate that there is an overall positive association between finance and growth for South Asia through the FDI and savings channels. The country-specific analyses suggest that the growth effects of financial channels are most pronounced in Sri Lanka, whereas, on the other hand, financial development plays no role in the Indian growth process in the short run. Bangladesh, Nepal, and Pakistan lie somewhere in between this spectrum with every country exhibiting unique growth paths which highlights the heterogeneity of the region.