Does poverty respond asymmetrically to financial development? Evidence from India using asymmetric cointegration and causality tests

Using annual time series data for India, this research paper examines the presence of asymmetric cointegration and asymmetric causality between financial development and poverty reduction using nonlinear autoregressive distributed lag (NARDL) model and asymmetric causality test. The empirical findings support the existence of asymmetries in the short-run as well as long-run between poverty and financial development. The asymmetry reveals that negative financial development shocks leave a more profound impact on poverty alleviation than their positive equivalents. The result emanating from asymmetric causality test reveal a unidirectional asymmetric causality between negative shocks in financial development and poverty. Moreover, expansionary policies of financial development are found to serve as catalysts to spur poverty alleviation while contractionary policies of financial sector are found to exacerbate poverty in an asymmetric and nonlinear fashion. The findings of Wald’s test also confirm the presence of asymmetric effects in the poverty-finance nexus. The asymmetric cumulative dynamic multipliers used to examine the behaviour of asymmetries and adjustments with respect to time lend credence to the results calculated using NARDL estimator and therefore demonstrate their robustness. The present study divulges the need for investigating asymmetry in finance-poverty nexus in order to draw policy-relevant conclusions. The authors conclude that financial development serves as a panacea and antidote to the scourge of extreme poverty in India. We recommend regulation of informal sources of credit, financial inclusion of poor, credit boost to small and medium enterprises employing rural poor and channelization of credit to productive sectors with high employment elasticity to be persistently encouraged for poverty alleviation in India.