Impact of the Money Supply on the Economic Growth in India

The Classical, Keynesian, and Monetarist schools of thought have all expressed different views on how the money supply affects economic growth. Using data from 1961 to 2023, this study attempts to investigate the relationship between the money supply and economic growth in India. It is widely believed that the money supply promotes growth, particularly in the short run. Key economic indices, including GDP, inflation, and unemployment, are examined in relation to changes in the money supply. This study synthesises data from several economies to shed light on how monetary policy contributes to sustained economic growth. The paper finds that the correlation coefficient between India’s GDP growth and M3 during 1961-2023 is approximately -0.0239, which indicates a very weak negative linear relationship between GDP growth and M3. However, the paper states that in the short run an increase in money supply affects GDP. There is a negligible correlation between inflation and the Broad Money M3. It is nearly impossible to detect the association. The paper suggests that there is a quite weak but generally positive association between unemployment rate and M3. Put another way, there is a tendency for the M3 money supply to rise in tandem with the unemployment rate, but this link is not particularly robust or steady.