2024, Vol. 6, Issue 3, Part A

Financial sector and real sector are interrelated. Financial sector mobilize credit to the real sector and allocating it for some productive activity, which again accelerates economic growth. The more developed the financial sector, better would be the intermediation of credit from financial sector to real sector. There are some main functions between financial sector and real sector. First, financial sector mobilizes credit from savers to investors. It diverse credit from any individual to some productive activity, which may incur returns in future, thereby enabling economic growth. Second, financial sector facilitates exchange of goods and services by providing the mechanism of transaction of payment. Third, Financial sector also transfers the risk or managing the risk by investing in diversified portfolio. It also facilitates intertemporal risk sharing over generation. In this diverse ways the financial sector and real sector are interconnected. Generally, in developed countries the financial sector is more developed compare to less develop or developing countries. In case of India, generally called developing country, financial sector may have some crucial role in channelization of credit to some productive investment which again accumulates economic growth.

Indian financial sector has undergone several challenges after the financial sector reform in 1991. As a result of financial sector reform financial intermediation has increased over time. The widening and deepening of financial sector invites more investable funds which again accentuates more productive investment which leads to higher economic growth. This increases the cyclical flow of credit of higher savings, improved investment efficiency and higher real economic growth.

Till now there are very few numbers of studies which are analyzing the relation between the financial sector and real sector. This paper also tries to explore the causal relationship between the financial sector and real economy. Thus the main objective of this study is to identify the interrelationship and direction of causality between the financial sector and real sector for the period 1990-2022 in Indian context and also explore the long run and short run association between the financial and real sector for the Indian economy.