Growth Through Financial Inclusion in India

Abstract

Financial inclusion is the ease of access, availability and use of the formal financial system by all members of the economy. The growing literature on financial inclusion has provided plenty of evidence of the merits of an inclusive financial system. However, we notice an absence of a comprehensive measure that can be used to measure the extent of financial inclusion in an economy. This study is an attempt to fill this gap, and, thus, make an original contribution. We propose an index of financial inclusion (IFI) following a multidimensional approach. The IFI developed here can be used to compare levels of financial inclusion across economies at a particular point of time. It can also be used to monitor the progress of policy initiatives for financial inclusion over a period of time. And, most important, such an index can be of interest to the research community in order to investigate empirical questions on relationship between development and financial inclusion. The IFI developed here incorporates information on various dimensions of an inclusive financial system, and it is easy to compute. The promotion of an inclusive financial system is considered a policy priority in many countries. While the importance of financial inclusion is widely recognized, literature fails to offer a comprehensive measure to measure the extent of financial inclusion across economies. This study attempts to fill this gap by proposing an index of financial inclusion (IFI). The IFI is a multi-dimensional index that captures information on various dimensions of financial inclusion in one single digit between 0 and 1, where 0 denotes complete financial exclusion and 1 indicates complete financial inclusion in an economy. The proposed index is easy to compute and is comparable across countries.