India's Finance-Growth Nexus with Carbon Emissions, Globalization, and Government Expenditure: A Non-Linear Approach Using ARDL and VARX Techniques

This study examines the causal relationship between financial development and economic growth (i.e., the finance-growth nexus) in India from 1970 to 2020. It is motivated as understanding the relationship between financial development and economic growth is crucial for policy formulation, particularly in emerging economies like India. Assuming the potential non-linearity of India’s finance-growth nexus, we employ Autoregressive Distributed Lag (ARDL) and Vector Autoregression with Exogenous Variables (VARX) cointegration techniques. It is also investigated how key control variables—carbon emissions, globalization, and government expenditure—affect this nexus. Economic growth is measured by real per capita GDP, while financial development is proxied by two indicators: financial depth (the ratio of private credit to GDP) and financial efficiency (the ratio of private credit to total deposits), which is one invention of this study. Using both ARDL and VARX techniques, our findings reveal a bidirectional and non-linear relationship between financial development and economic growth, irrespective of the financial development proxy used. This bidirectional relationship highlights the intertwined nature of economic growth and financial development, suggesting that policies targeting either must consider the implications for the other, particularly within the current context of sustainable development and globalization.