Does Financial Inclusion Spur Economic Growth in India?

Financial inclusion is a multi-dimensional concept with heterogeneous views prevailing across the globe. The motto of financial inclusion is to provide affordable financial services to all sections of society to improve their standard of living. This is an integral part of economic growth as it not only assures financial sector development but also spreads affordable financial services for the betterment of each section of the society. Broadly, it is the process of allocation of the financial services to the weaker section of the society at an affordable cost. The motivation of this study is to examine the effect of financial inclusion on economic growth in India over the 1980 to 2014 period. The present study uses annual time series data on number of deposit and credit account from scheduled commercial banks in proportion to 1,000 adults, number of bank branches in proportion to 1,000 adults, and number of bank employees as the ratio of bank branches, amounts of deposits and credits as ratio of GDP collected from Basic Statistical Returns, RBI. Data for other macroeconomic controls like inflation, total trade, total secondary school enrollment (as a proxy for human capital) and government expenditure are collected from World development Indicators.The study employs Principal Component Analysis (PCA) to construct a financial inclusion index which measures the financial access in the Indian economy. Using the Autoregressive Distributed Lag (ARDL) and Error Correction Model (ECM), the study finds a positive impact of financial inclusion on economic growth both in the long run and short run. In addition, the empirical estimates posit a unidirectional relationship between financial inclusion and economic growth. Moreover, this study reports that financial liberalization policy has contributed to the economic growth in India. Our estimates suggest that the most important task for the government of India is to improve the efficiency of financial institutions, which will simultaneously stimulate financial inclusion as well as economic growth.