Financial innovation can hamper the sustainable economic growth: A tale of two emerging economies

Abstract

This study compares the sustainability of financial innovation, development, and economic growth in India and China, considering macro-economic factors like globalization, inflation, and monetary policies. It addresses the impact of financial development on sustainable economic growth by analyzing these two major emerging economies. The ARDL co-integration approach is used to assess long-run and short-run relationships among variables, focusing on sustainability. The results show a long-term co-integration among financial innovation, development, and economic growth, revealing challenges to sustainable development. Both countries show a negative long-term relationship between financial innovation, development, and economic growth, with India's impact larger in magnitude than China's. In contrast, short-term results are positive and significant for both nations. The ECT term suggests India requires more short-run adjustments to reach equilibrium. Overall, financial initiatives in both countries, amid globalization and monetary challenges, do not support sustainable long-term GDP growth but have short-term positive effects. China performs better due to smaller negative coefficients and fewer adjustments needed. The findings align with economic theories such as the Solow growth model and the theory of endogenous growth, emphasizing efficient allocation of financial resources for growth. This research adds valuable insights to the literature on sustainable economic outcomes in India and China, providing policymakers with guidance for future strategies to achieve sustainable growth.