246 Indian J Econ Dev DOI No. 10.5958/j.2322-0430.10.3.055 Volume 10 No. 3 (2014): 246-255 Research Article NEXUS OF FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN INDIA: REVISITING SCHUMPETER Bhanu Pratap Singh and Alok Kumar Mishra * ABSTRACT The study focuses to examine the nexus of financial development and economic growth in India. Despite of multiple views on this nexus all schools of economic thought acknowledged the role of finance as a facilitator in the economic system. The current study uses the functional approach to finance growth nexus in which financial development reduces market frictions via transaction and information cost in the economy. The study utilizes annual time series data for the period spanning from 1988 to 2011. The Fully Modified Ordinary Least Square (FMOLS) and Johansen Maximum Likelihood procedure of cointegration techniques are utilized to examine the long-run equilibrium dynamics among financial development and economic growth indicators. Toda and Yamamoto (1995) Granger’s Causality tests was applied to look into the short-run causal relationship. The major findings of the study suggest that Schumpeter’s view on finance and growth nexus does not keep good in the context of Indian economy. Key Words: Economic growth, financial development, finance-growth nexus JEL Classification: C30, E44, O57 * Doctorate Fellow and Assistant Professor, School of Economics, University of Hyderabad, Prof. C.R. Rao Road, Gachibowli, Hyderabad-500046 (Telengana) Email: bhanuatindia@gmail.com INTRODUCTION Since 1991, the Indian economy undergone significant change in its structure and there is an enormous increase in the size of the financial market. With the view to promote economic growth and development a high level Committee was formed on August 16, 1991 under the Chairmanship of Sri M. Narasimhan. The global financial crisis of 2007 again raised the question over the nexus of financial development and economic growth. After two decades of economic reforms now the question arises, what effect do these developments in the financial sector have on economic growth in India? If Schumpeter is right, then what are the reasons behind the inability of the financial system in promoting economic growth in India? The aim of this paper was to revisit this nexus and try to find the rigidities in the financial market. There is a long standing debate whether finance has promoted economic growth since from 2 nd decade of the 20th century. Joseph Schumpeter (1911) was perhaps the first economist to examine this nexus. According to Schumpeter (1911) at any particular point in time the economy is in static state and there is a circular flow of the production process which remains economy at the lower level of