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Nexus between financial inclusion and economic growth: Evidence from the
emerging Indian economy

Article in Journal of Financial Economic Policy · February 2016

DOI: 10.1108/JFEP-01-2015-0004

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Nexus between financial Financial

inclusion and
inclusion and economic growth economic
growth
Evidence from the emerging Indian economy
Dipasha Sharma 13
Department of Finance, Symbiosis International University, Pune, India
Received 6 January 2015
Revised 3 May 2015
5 August 2015
Abstract 23 September 2015
Purpose – The purpose of this study is to assess the nexus between the vast dimensions of financial Accepted 2 November 2015
inclusion and economic development of the emerging Indian economy.
Design/methodology/approach – In this study, vector auto-regression (VAR) models and Granger
causality test were followed to test the main research question in Indian context. The data were collected
on various dimensions of financial inclusion and economic development for the period 2004-2013.
Findings – Empirical results and discussion suggest that there is a positive association between
economic growth and various dimensions of financial inclusion, specifically banking penetration,
availability of banking services and usage of banking services in terms of deposits. Granger causality
analysis reveals a bi-directional causality between geographic outreach and economic development and
a unidirectional causality between the number of deposits/loan accounts and gross domestic product.
The results obtained favor social banking experiments in India with a deepening of banking
institutions.
Research limitations/implications – This study is limited to the banking institutions and
specifically to the emerging and developing economies.
Practical implications – This study analyzes the quantitative value of social banking experiments
and governments’ efforts to enhance financial inclusion in terms of economic growth.
Social implications – Financial inclusion plays a key role in developing a strong and an efficient
financial infrastructure, which facilitates the growth of an economy. The findings of the study reveal
that there is a strong association between banking penetration and growth. The discussion leads in the
favor of deepening of the banking institutions, and therefore, policymakers can look forward to these
findings to maintain a sustainable-inclusive-developed economic system in an emerging economy like
India.
Originality/value – This study is original in nature and includes recent evidence and efforts to
promote financial inclusion in the Indian economy. The findings of this study will be of value to banks
and policymakers.
Keywords Banks, Financial economics, Economic growth and aggregate productivity
Paper type Research paper

1. Introduction
An efficient flow of funds channelized by a sound financial system helps in accelerating
the growth of an economy (McKinnon, 1973). This is true for all aspects of developed and
developing economies. In this regard, banking institutions are the major organized
Journal of Financial Economic
Policy
Vol. 8 No. 1, 2016
JEL classification – G21, O160 pp. 13-36
The author would like to thank Professor James Barth and Professor John Jahera, Editors of © Emerald Group Publishing Limited
1757-6385
Journal of Financial Economic Policy along with the anonymous reviewers for valuable comments. DOI 10.1108/JFEP-01-2015-0004
JFEP financial intermediaries that help strengthening the financial system of an economy.
8,1 Their sound and effective operations serve to channelize funds from savers to borrowers
and lubricate the wheels of economy. However, when half of the world’s population is
unbanked, this scenario is different and all the above come into question. They neither
have any awareness nor do they have access to financial systems or any kind of formal
or semi-formal financial services for saving or borrowing money (see a published report
14 by Mckinsey & company, 2009). The scenario might be even worse in the case of
developing economies. These statistics highlight the current scenario of financial
exclusion and the dire need for achieving financial inclusion. Financial exclusion can be
fatal for the growth of an economy because it tends to hamper its financial
infrastructure, which is undoubtedly a key driver of economic growth (Gurley and
Shaw, 1955; Goldsmith, 1969; Greenwood and Jovanovic, 1990; Diamond and Dybvig,
1983; Angadi, 2003). Hence, financial inclusion plays a key role in building a strong
foundation of a country’s financial infrastructure, which in turn will facilitate its
economic growth and development. Further, the absence of financial inclusion leads to
financial illiteracy and to the emergence of an unorganized financial sector such as
indigenous banking, which is extremely exploitative in nature. India, a developing
economy, is a bank-based economy, where banking institutions dominate the financial
system. India is the second-most populous country and home to 1.21bn people, and its
economy makes an interesting case to study financial inclusion. However, almost 40 per
cent of the Indian population is unbanked and financially excluded.
To overcome this issue, the Government of India has taken several important steps,
some of which make it:
• mandatory for banks to open their branches in rural areas; and
• to provide access and penetration of banking over the spread of geographical
boundaries.

However, there remains much to be desired on this front.

In August 2014, Mr Narendra Modi, the Prime Minister of India, launched the
“Pradhan Mantri Jan-DhanYojna” (a plan to provide financial services and bank
accounts with no stipulation for maintaining a minimum balance in the account). Over
the span of this launch, a total of 125m bank accounts were opened (as on January 31,
2015) by banks. Bank accounts were also provided with the issuance of RuPay[1] debit
cards, which have an inbuilt personal accident insurance cover of INR 0.1m provided by
HDFC Ergo[2] and a life cover of INR 30,000 provided by Life Insurance Corporation
(LIC)[3]. It is felt that this will certainly add value to the social lives of the
underprivileged by bringing them under the banking umbrella, and it is the first step
toward achieving financial literacy in the country.
However, merely opening of these bank accounts may not give good results in terms
of economic growth. It may result in a burden of no-frill/dormant accounts, which is
certainly not the objective of financial inclusion. Thus, in this context, it is necessary to
investigate the contextual liaison between the financial inclusion and economic growth
of any nation.
In the existing literature, there seems to be less written and analyzed on this nexus
between financial inclusion and economic development and growth. There is an ongoing
debate on the nexus between a strong financial system (in terms of financial deepening)
and growth prevalently known as the finance– growth nexus. Walter (1873) and
Schumpeter (1912) highlighted the critical role of the banking system in economic Financial
growth. Goldsmith (1969), McKinnon (1973) and Shaw (1973) suggested that an efficient inclusion and
flow of funds from banks through their widespread network leads to innovation and
develops enterprise due to the availability of credit. On a similar note, King and Levine
economic
(1993) provided empirical evidence in favor of the banking system as a strong growth
financial intermediation system that leads to long-run economic growth through
capital accumulation and enhanced productivity. These arguments support the finance– 15
growth nexus and demonstrate the strong role of the banking system in the creation of
finance, which certainly leads to economic growth.
However, it is not necessary that similar results will be achieved in all scenarios and
that the finance– growth nexus will be a unidirectional relationship (Robinson, 1952).
Literature review also revealed another theory in the growth–finance nexus, which
supports the demand side story and states that a flourishing economy ignites the need
for sustainable financial infrastructure, which should be based on a strong and inclusive
financial system (Demetriades and Hussein, 1996).
Interestingly, this finance– growth and growth–finance nexus is not observed
positively in every case as demonstrated by Lucas (1988), who concluded that
researchers tend to overhype the role of the financial system. Robinson (1952) suggested
that banks play an inactive role in the economic growth of a nation. Therefore, this
nexus may vary due to diverse economic and political factors across economies, and
hence, it needs to be analyzed over different economies and periods.
There is a dearth of studies in the literature pertaining to financial inclusion as a
dimension of financial development. Economies may perceive financial inclusion as an
objective that will incur an additional cost or treat it as something that will lead to an
inefficient allocation of funds and eventually to the deterioration of economic
development. However, under no circumstance can one deny the vital role of financial
inclusion in terms of financial stability of the society and the holistic development of all
demographic parameters.
In light of all the above findings in the literature and considering the inadequacy of
studies in the area of financial inclusion and growth nexus, this study aims to explore
the causal nexus between the various indicators of financial inclusion and economic
growth of India.
The rest of the study is planned as follows: Section II highlights the growth of
financial inclusion in India as measured by various indicators. Section III reviews the
literature and significant work performed in this field. Section IV outlines the theoretical
framework, data and econometric model. Section V outlines the empirical results and
discussion. Section VI concludes the study and lists its limitations, policy implications
and the future scope of research.

2. Financial inclusion in India

In simple and limited words, financial inclusion can be defined as a means to provide
banking/financial services to the society. The global community, however, has a wider
perspective on the definition and scope of financial inclusion/exclusion. K.C.
Chakraborthy, the then Chairperson of Indian Bank in 2005, was the first to promote
financial inclusion in India.
A remote village in India named Manglam became the first village in India where all
households had bank accounts. This was achieved when banks had provided relaxed
JFEP norms and various facilities to the residents of the village. Later on in 2006, to pave the
8,1 way for financial inclusion in India, the Reserve Bank of India (RBI) (i.e. India’s central
bank) allowed commercial banks to take the help of micro-financial institutions (MFIs)
and self-help groups (SHGs) to accomplish this task. These MFIs and SHGs had more
penetration in rural areas and worked on a business model that catered to the
traditionally unbanked customer.
16 Dev (2006) has highlighted the vital role of financial inclusion as a strategic means to
improve the livelihood of poor farmers and rural enterprises along with various issues
and challenges of financial inclusion in India. He defined financial exclusion in terms of
lack of access to credit from formal financial institutions and highlighted the high level
of financial exclusion faced by small and marginal farmers. To overcome this, he
pointed out the key role of SHGs along with the steps taken by banks and the RBI.
However, financial inclusion cannot merely be assumed to be a practice of social
banking (Kamath, 2007) and needs to be considered beyond that.
Policymakers and economists have defined financial inclusion in several ways and
suggested requisite policy frameworks to suit the Indian scenario (Srinivasan, 2007;
Dasgupta, 2009). The RBI had come up with two reports pertaining to the issues of
financial inclusion in India: one under the Chairmanship of C. Rangrajan and the other
under the Chairmanship of Raghuram G. Rajan. Dasgupta (2009) analyzed both these
reports and concluded that there was a similarity in the diagnosis of financial exclusion.
However, remarkably, both these approaches were found to be divergent on the
treatment of financial inclusion in India.
Quantification of the extent of financial inclusion is a complicated issue. The number
of bank accounts or banked population does not fulfill the purpose of inclusive growth.
The term “inclusive financial growth” can be further defined by way of a “Financial
Tripod”, to indicate the triangular relationship between financial education, financial
inclusion and financial stability.
Financial inclusion provides the population at the bottom of the pyramid with easy
financial access, which leads to financial literacy to cater to their financial needs.
Financial inclusion also facilitates the flow of funds from savers to borrowers. This
efficient flow of funds largely leads to a sustainable, efficient and effective financial
system and eventually to the financial stability of the society. Figure 1 shows how
financial literacy, financial inclusion and financial stability are associated. These three

Figure 1.
Financial tripod
elements represent the internal strategy because financial inclusion provides access to Financial
formal financial services and plays the role of the supply side. The demand side is inclusion and
managed by financial education because it provides awareness and empowers the
society. The strategic collaboration of both financial inclusion and financial education
economic
leads to financial stability of the society and economy as a whole (Bhaskar, 2013). growth
The World Bank and International Monetary Fund (IMF) have attempted to measure
the extent of financial inclusion worldwide. The World Bank has developed a global 17
financial index to measure the financial inclusiveness across various economies. In 2011,
the World Bank conducted a survey of various parameters of credits, insurance,
payments and savings. This was followed by the IMF conducting its financial inclusion
survey in 2012. It was primarily based on financial access parameters, that is, automated
teller machines (ATMs), bank branch penetration, outstanding deposits as a percentage
of the gross domestic product (GDP) and outstanding credit as a percentage of the GDP.
Figures 2-5 show the extent of financial inclusion in India vis-à-vis that in other
economies, based on various surveys and reports.

World Bank's F inancial Inclusion Survey:

Proportion of Population of Age

Credit Dimension
70
60 Loan from a financial
50 institution in the past year
40
15+

income, top 60%

30 Loan from a financial
20 institution in the past year
10 income, bottom 40%
0 Loan from a financial Figure 2.
institution in the past year World Bank’s global
financial inclusion
index: credit from a
Source: World Bank Database Financial Institution

World Bank's Financial Inclusion Survey:

Proportion of Population of Age

Credit Dimension
160
140 Loan in the past
120 year income,
100 top 60%
15+

80 Loan in the past

60 year income,
40 bottom 40%
20
Loan in the past
0 year
Figure 3.
World Bank’s global
financial inclusion
Source: World Bank Database index: credit received
JFEP Figure 2 shows the extent of financial services made available to raise a loan from a
8,1 financial institution. This has been further categorized into a lower-income group and a
higher-income group (proportion of the population aged ⬎15 years). The Indian
scenario seems to be somewhat better when compared with the Russian, Chinese and
Brazilian economies, but it is significantly behind that of the developed economies of the
USA, UK and Germany. These data clearly exhibit that there is a negligible difference
18 between the two income groups in terms of access to financial services, and therefore, it
is obvious that the extent of financial inclusion cannot be determined based on income
disparity.
Figure 3 shows that this scenario differs significantly, and the data show the
proportion of the population aged ⬎15 years that takes a loan (from any source, not
necessarily from financial institutions). Interestingly, in India, loans raised by any
means are observed to be higher for the lower-income segment than for the
upper-income group. This clearly exhibits the prevalent network of indigenous banking
and other money laundering methods among the weaker sections of the society. This is

World Bank's Financial Inclusion Survey:

Proportion of Population of Age

Deposit Dimension
200
saved at a f inancial
150 institution in the past year
income, top 60%
15+

Figure 4.
World Bank’s global
financial inclusion
index: savings in a
Financial Institution
100
saved at a f inancial
50 institution in the past year
income, bottom 40%
0
saved at a f inancial
institution in the past year
Source: World Bank Database

World Bank's Financial Inclusion Survey:

Proportion of Population of Age 15+

Deposit Dimension
250

200

150 saved any money in the

Figure 5.
World Bank’s global
financial inclusion
index: savings
past year income, top 60%
100 saved any money in the past
year income, bottom 40%
50
saved any money in the past
0 year
Source: World Bank Database
actually an alarming situation encountered while fostering financial inclusion, and the Financial
focus should be on increasing connectivity of the poor and weaker sections of the society inclusion and
to formal financial services.
Further, the scenario of deposit or savings accounts in the different economies as
economic
accessed by the proportion of population aged ⬎15 years (Figures 4 and 5) will allow us growth
to closely examine the extent of financial services.
Figures 4 and 5 show that in India, there is a higher deposit dimension for the 19
higher-income group than for the lower-income group. In addition, China seems to have
higher deposit dimensions in comparison to India. In terms of credit dimensions, both
China and India seem to be similar in their financial inclusion levels. Further, when it
comes to deposit dimensions, India lags behind China. This clearly exhibits that the
penetration of the unorganized sector in the case of credit is more in developing
economies than in the developed ones.
The financial inclusion survey conducted by the IMF in 2012 was focused more on
the three basic dimensions of financial intermediation by banks, which are as follows:
(1) penetration of the banking sector in terms of the number of deposits and credit
accounts;
(2) access of financial services in terms of the penetration of ATMs and bank
branches over geographic boundaries; and
(3) extent of the usage by the general public of all these services (Sarma, 2008, who
developed an index for financial inclusion by first adopting similar indicators).

These indicators enable us to get a glimpse of the financial inclusion in India over
several years (Figures 6-8). Figure 6 presents the extent of banking penetration in terms
of deposit and loan accounts per 1,000 adults in India during 2004-2013.
On a positive note, banking penetration in terms of the number of accounts shows an
increasing trend over the specified period. However, the mere opening of deposit
accounts may not result in financial growth, and therefore, the survey further includes
indicators of access of banking services and usage of banking services.
Figure 7 shows the extent of financial inclusion in India in terms of the availability of
financial services. Availability may be defined as the geographic and demographic
penetration of bank branches and ATMs during the specified period. It is interesting to

Figure 6.
Financial inclusion in
India: banking
penetration
JFEP 45
40
8,1 35
30
25
20

20 15
10
5
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 7. Bank Branches per 1000 Km Bank Branches per 0.1 million adults
Financial inclusion in ATM per 1000 Km ATM per 0.1 million adults
India: availability of
financial services Source: IMF Database

Figure 8.
Financial inclusion in
India: usage of
financial services

note here that the reach of ATM facility is outpacing the geographical bank branch
penetration over the years. ATM kiosks provide many banking facilities, including
withdrawal and fund transfers for debit cardholders. Therefore, ease of access and
penetration are more for ATMs than for brick-mortar branches.
However, the extent of banking penetration and access of services are also not
sufficient to obtain the desired economic growth. Considering this, we have studied the
usage of financial services in terms of outstanding loans as a percentage of the GDP and
outstanding deposits as a percentage of the GDP over the study period (Figure 8). The
numbers exhibit an increasing and positive trend over the specified years as a mark of
financial inclusion in India as enabled by banking institutions.
The overall discussion on the theoretical concepts of financial inclusion along with
the necessary data provides an insight into the issue of financial inclusion. We will
continue this discussion in the next section through our critical review of the literature
on financial inclusion by considering various dimensions of financial inclusion in India
and other developing and developed economies.

3. Review of the literature

Most of the literature is focused on the theoretical and conceptual development of
financial inclusion and inclusive growth achieved through financial inclusion in the
context of developing and developed economies. However, there are multiple
dimensions of financial inclusion, and banking institutions, MFIs and SHGs play a Financial
major role. The deepening impact of financial inclusion has been analyzed in terms of inclusion and
women empowerment, entrepreneurship development, policy and regulatory issues and
sustainable financial systems. Different studies have defined financial inclusion based
economic
on different terms and perspectives, with the ultimate objective of providing access of growth
formal financial services to the common person and the society at large. The literature
was reviewed in the context of the research question and ponders arguments on the 21
measurement of financial inclusion along with the determinants of financial inclusion
and impact of financial inclusion on growth through evidence from cross-country
studies.
To measure “Financial Inclusion” in terms of the role of banking institutions, Sarma
(2008) and Arora (2010) developed a multi-dimensional index of financial inclusion.
Further, to understand the variation in the usage of financial services across and within
148 countries, Demirguc-kunt and Klapper (2012) conducted a primary survey based on
the indicators of the Global Findex Database developed by the World Bank in 2012.
Sarma (2008), Arora (2010) and Demirguc-kunt and Klapper (2012) concluded their
exemplary work by testing their robust financial inclusion index across countries.
Because earlier studies were based on an overview of financial inclusion across
countries, Chakravarty and Pal (2013) developed a financial inclusion index to conduct
a state-wise analysis in India. Based on the six attributes of financial inclusion given by
Beck et al. (2009), they developed a conceptual framework of the financial inclusion
index in the Indian context and Indian states. Gupte et al. (2012) computed a financial
inclusion index specifically for the Indian scenario, for dimensions, including outreach,
usage, ease of transactions and cost of transactions from the perspective of banking
institutions for 2008-2009. Interestingly, all of these financial inclusion indices are based
on banking institution indicators, which directly exhibits the key role played by
banking institutions in promoting financial inclusion in any economy. Kendall et al.
(2010), however, considered the role of MFIs, co-operative and credit institutions and
finance companies along with banks in financial inclusion. They developed a measure
for financial access for 139 countries worldwide. They concluded that the indicators of
development and physical infrastructure were positively related to the indicators of
deposit accounts, loans and branch penetration. CRISIL (2013) Inclusix[4] measures
financial inclusion in India at the district level more comprehensively, taking account of
branch penetration, credit penetration and deposit penetration. It has defined financial
inclusion as “The extent of access by all sections of society to formal financial services
such as credit, deposit, insurance, and pension services”. CRISIL published this report
on the financial inclusion in India with the support of the ministry of Finance, the
Government of India and the RBI. Based on the index, it was concluded that India has a
relatively low inclusion score and that deposit penetration is a key driver of financial
inclusion. On a positive note, this report found signs of improvement of financial
inclusion in India during 2009-2011. Diverse geographical locations have varied access
of financial services, and branch penetration is very low in remote hilly locations.
The literature available on financial inclusion index exhibits vast dimensions of
financial inclusion measures in terms of geographical boundaries and indicators.
However, most of the studies have more or less followed similar methodologies to obtain
conclusive results and pointed out the key role of banking institutions because most of
the indicators pertained only to banks.
JFEP Later on, the literature has evolved with the empirical evidence on the contextual
8,1 nexus between the financial inclusion index and other socio-economic and
infrastructure indicators. Sarma and Pais (2011) established the empirical association
between the level of financial inclusion and country-specific factors, whereas Ghosh
(2011) critically evaluated the role of financial outreach on the economic growth of the
Indian sub-national-level data. Ghosh (2011) followed the previous work of Beck et al.
22 (2007) and Kendall et al. (2010). He provided evidence on the positive impact of social
banking experiments on economic growth and claimed that financial outreach and
usage of financial services influenced the state per capita growth with the vital role of
technology. However, it is not necessary that all economic systems will exhibit a positive
nexus with financial inclusion, and it may not lead to a positive finance– growth nexus
(Barajas et al., 2012).
Financial inclusion, in general, entails access to financial services at a cheaper cost
(Bhaskar, 2013), which certainly leads to financial stability of an economy. However, it
may not necessarily have a positive impact in all cases (Mehrotra and Yetman, 2015).
Financial inclusion achieved through swift credit growth or unregulated intermediation
of funds can negatively affect financial stability and result in a distressed finance–
growth nexus (Mehrotra and Yetman, 2015). Financial crisis and failure of economic
systems significantly affect the finance– growth nexus. Over financing and the 2008
crisis slowed down the growth in the advanced economies of Germany, France and the
UK, whereas in the emerging Indian and Chinese economies, there was a sustained high
growth (Bhattarai, 2015). Emerging economies were found to be interesting cases
because financial deepening and growth are co-integrated in the long run and exhibit
causality (Pradhan, 2010). However, in a cross-country analysis, Apergis et al. (2007)
found bi-directional causality between financial deepening and growth.
In the long run, the association between the deepening impact of the banking system
and economic growth weakens because excessive and rapid deepening of the banking
system may not result in productive credit and can lead to inflationary pressures. To
validate this hypothesis, Demetriades and Hussein (1996), Rousseau and Wachtel (1998)
and Arestis et al. (2001) assessed the relationship between financial deepening and
growth across countries. This nexus varies with inflationary pressures (Rousseau and
Wachtel, 2002) and level of economic development (Rioja and Valev, 2004). The nexus
between financial inclusion and growth indicated measurable heterogeneity across
countries due to regulatory/supervisory characteristics and differing performances on
financial access for a given level of depth (Barajas et al., 2012). It is very interesting to
note that very few studies focused on the direct association between financial inclusion
and growth of an economy. However, economists in cross-country studies (Ndebbio,
2004; Rousseau and Wacthel, 2005; Berentsen and Shi, 2008; Masoud and Hardaker,
2012; Barajas et al., 2012) have found that financial deepening is indirectly associated
with economic growth.
Specific to the Indian context, Kumar (2013) and Chakravarty and Pal (2013) studied
the various determinants of financial inclusion across states. Kumar (2013) concluded
that region-specific socio-economic and environmental factors play a vital role in
determining financial inclusion. However, Chakravarty and Pal (2013) concluded that
the geographic penetration of banks and availability of credit are the key policy
objectives for improving financial inclusion.
 Specific to the Northeast region[5] in the Indian context, Bhanot et al. (2012) used a Financial
structured questionnaire-based survey to investigate 411 households and assess factors inclusion and
contributing to financial inclusion. They claimed that financial information and
education were the key influential factors along with geographical proximities and
economic
government benefit plans. growth
The overall review of the literature suggests that scholarly work in this area has
evolved through various dimensions starting from conceptual development, 23
economy-specific issues and challenges and has later moved on to the development of an
index to measure financial inclusion. The recent literature reveals determinants and
major influencing factors of financial inclusion to be topics of interest. A critical review
of the finance– growth nexus helps identify the various facets of finance– growth
relationship and reveal the vital role of banking institutions in financial development.
The review of the literature has helped to develop research question and to identify an
appropriate methodology to address prevailing issues.
In the later sections of this paper, we have developed a theoretical and econometric
model and have provided a detailed discussion and conclusive remarks.

4. Theoretical framework and data source

To address the research question, in this study, we explored the contextual nexus
between various indicators of financial inclusion and economic growth of India. This
study was based on the exemplary work of Sarma (2008), World Bank and IMF surveys,
previous literature and recommendation of the Bank for International Settlements
(Caruana, 2012) on financial inclusion and focuses on banking institutions as a key
player in financial inclusion. This is also significant in light of the recent launch of the
“Pradhan Mantri Jan Dhan Yojna” scheme of the Government of India for opening a
bank account, as part of their financial inclusion initiatives.
Based on the previous literature and the significance of banking institutions in
financial inclusion in a bank-based economy such as India, this study focuses on three
core dimensions of financial inclusion. These dimensions are:
(1) penetration of banking institutions;
(2) availability or access of banking services; and
(3) resultant usage of banking services.

Penetration of banking institutions has been defined based on the following factors:
• number of deposit accounts held by commercial banks per 1,000 adults; and
• number of loan accounts held by commercial banks per 1,000 adults.

Number of accounts is the only significant indicator to help us understand banking

penetration and outreach as per the availability in our data sets. In line with the findings
of Beck et al. (2007), Kendall et al. (2010) and Ghosh (2011), these indicators exhibit the
penetration and usage of financial services by the society and, therefore, play a notable
role in the measurement of financial inclusion.
Access of banking services has been indicated in terms of the following:
• bank branches per 1,000 km;
• bank branches per 0.1m adults;
JFEP • ATMs per 1,000 km; and
8,1 • ATMs per 0.1 m adults.

These indicators exhibit geographical and demographical financial outreach (Beck et al.,
2007; Kendall et al., 2010; Ghosh, 2011). The banking outreach plays a major role in
inclusive growth, because in India specifically, banks intermediate most of the finances
24 (Ghosh, 2011). Moreover, sound economic growth depends upon an efficient and
productive allocation of funds by banking institutions (McKinnon, 1973). Access of
banking services may also include dimensions related to Internet banking and mobile
banking. However, in India and specifically in rural areas, people still prefer to go to
brick and mortar branches instead of virtual branches to avail banking services. People
prefer to use mobile banking only for checking their balances or for getting short
messaging service alerts on each transaction. Based on the data gathered by a report of
Telecomindiaonline.com (2008), checking of account balances and viewing of the past
three transactions are the most popular mobile banking services. However, payments
and transactions through mobile have not been used much in rural India. Indian
customers are avoiding mobile banking mainly due to reliable and easy access to ATMs
and e-banking and due to security concerns. The penetration of mobile banking was
only 0.2 per cent in India until 2009, and this was expected to increase to 2 per cent by
2012. The expected benchmark was achieved with 22.51 m active m-banking users in
2012-2013, which was only 2.5 m in 2009 (RBI’s report of technical Committee on Mobile
Banking, 2014, and Report of Celent, Indian Mobile banking Unexplored, 2009).
Private and foreign players in metropolitan cities seem to be involved in the major
chunk of online banking-related business activities. The recent figures (from a report of
McKinsey & Company, McKinsey India Personal Financial Service Survey, 2011)
exhibit a 130 per cent increase in the use of Internet banking in India during 2007-2011
with a 15 per cent decline in branch banking. Nevertheless, in India, only 7 per cent
account holders use Internet banking for their transactions. Therefore, one cannot
neglect the increasing role of e-banking and m-banking in the near future. However, as
far as financial inclusion is concerned, e-banking and m-banking are still in their nascent
stage of being considered as suitable factors.
Usage of banking services entail the following:
• outstanding deposit per cent GDP; and
• outstanding credit per cent GDP.

To omit the effect of no-frill/dormant accounts, it is necessary to take account of the

contribution of deposits and credits toward the economic growth of a nation. Thus, the
usage of banking services may result in the identification of the key determinant of
economic performance.
In this study, the natural logarithm of real GDP per capita is used, as per the
availability of data on each variable. Data were collected during 2004-2013. The data
were extracted from the World Bank and IMF databases.

4.1 Econometric model

To understand the underlying link between financial inclusion and economic growth, it
is essential to understand the dynamics of the Indian economy as to whether there exists
a finance– growth nexus or a growth–finance nexus. Considering the supply-leading
hypothesis, financial infrastructure leads to growth, and therefore, financial inclusion Financial
should be considered as a cause and economic growth as an effect variable. However, the inclusion and
demand-following hypothesis is based on another argument and states that high
economic growth drives financial infrastructure and banking facilities. Thus, the Indian
economic
economy may have a two-way linkage between financial inclusion and growth. growth
All variables are time series variables, and explicitly, the GDP of the current year
may be significantly influenced by the previous year’s values, which creates a lag effect 25
in data. Therefore, the econometric model used in this study needs to consider the lag
effect in the series and causality to attain the desired outcome.
Considering all these arguments, in this study, we used the unrestricted vector
auto-regression (VAR) model introduced by Sims (1980) and VAR Granger causality
test (Granger, 1988) to assess the underlying nexus between financial inclusion and
growth. The VAR model helps to investigate the joint dynamic behavior of a collection
of time series and lag effect of variables. Time series data may suffer from
non-stationary movement of series. Therefore, the stationarity of data series needs to be
checked using the augmented Dickey–Fuller (ADF) (Dickey and Fuller, 1981) and the
Phillips and Perron (PP) (Phillips and Perron, 1988) unit root tests. The optimum lag
structure was obtained with the lowest Akaike information criterion (AIC).
In this study, we developed a VAR model to explore the causal relationship between
various individual financial inclusion indicators and GDP, as well as composite
dimensions of penetration, access and usage with the GDP. The VAR model contained a
set of m variables, expressed as a linear function of p lags of itself and p lags of the
explanatory variable along with an error term. Therefore, we considered the VAR model
with the GDP and each dimension of financial inclusion with two lags (optimum lag
structure will be considered based on the lowest AIC) and developed the following model
to address our research question:

GDPt ⫽ ␤0 ⫹ ␤1GDPt⫺1 ⫹ ␤2GDPt⫺2 ⫹ ␤3Penetrationt⫺1 ⫹ ␤4Penetrationt⫺2 ⫹ et

(1)

Penetrationt ⫽ ␤0 ⫹ ␤1Penetrationt⫺1 ⫹ ␤2Penetrationt⫺2 ⫹ ␤3GDPt⫺1

⫹ ␤4GDPt⫺2 ⫹ et (2)

Here, t represents the current year and t – 1, t – 2 exhibit lag relationships.

The VAR model, thus, provides enough flexibility for choosing endogenous and
exogenous variables, and further, VAR Granger causality can be assessed to
understand the direction of causality and nexus of financial inclusion and growth.
Similar models can be run for other financial inclusion dimensions, such as usage, access
and their individual parameters.
Based on the derived model and data set, we next explore the empirical association
and causality between GDP and financial inclusion dimension for different VAR
models.

5. Empirical results and discussion

In this section, we will elaborate the empirical results and explore the association
between the various dimensions of financial inclusion and economic growth. Table I
gives the descriptive statistics of variables.
JFEP Variables Mean Median Maximum Minimum SD
8,1
Ln GDP 6.99 7.00 7.33 6.47 0.31
Banking penetration 0.49 0.50 1.00 0.00 0.33
Ln number of deposit accounts 6.66 6.63 7.08 6.41 0.24
Ln number of loan accounts 4.82 4.88 5.01 4.48 0.17
26 Access 0.33 0.22 1.00 0.01 0.34
Ln number of ATMs per 1,000 km 2.61 2.57 3.66 1.66 0.73
Ln number of ATM per 0.1 m adults 1.62 1.55 2.58 0.83 0.65
Ln number of bank branches per 1,000 km 3.30 3.27 3.57 3.12 0.16
Ln number of bank branches per 0.1 m adults 2.28 2.25 2.49 2.19 0.11
Usage 0.45 0.53 1.00 0.00 0.30
Outstanding credit % GDP 41.10 42.92 55.14 27.15 8.23
Outstanding deposits % GDP 56.21 58.11 69.98 46.61 7.42

Notes: Ln indicates that figures are taken as natural logarithms; GDP: GDP per capita; banking
penetration: composite index of the number of loan and deposit accounts; access: composite index of the
Table I. number of ATMs per 1,000 km/0.1m and the number of bank branches per 1,000 km/0.1m; usage:
Descriptive statistics composite index of outstanding deposit and credit

The results of the unit root test (Table II) were used to check the stationary nature of data
series. All data series reject the null hypothesis that the series has a unit root, and
therefore, the results confirm stationary data series.
After correcting for unit root, we explored the underlying nexus and causality for GDP
and various indicators of financial inclusion under the VAR model. Optimum lag
structure was determined as “2” with the help of the lowest AIC. The VAR model does
not differentiate between endogenous and exogenous variables. It considers all
variables in the model as endogenous and runs different auto-regressions for different
combinations with the determined lag variables.
It is interesting to note that the models with GDP as dependent variable are found to
be significant models. Therefore, in this study, we have presented all significant models

ADF unit root test PP unit root test

Variables t-statistics p-value t-statistics p-value

Number of loan accounts ⫺3.370 0.046 ⫺12.68 0.000

Number of deposit accounts ⫺3.215 0.038 ⫺5.244 0.04
Number of ATMs per 1,000 km ⫺7.220 0.001 ⫺7.033 0.000
Number of ATM per 0.1 m adults ⫺5.7278 0.004 ⫺5.031 0.005
Number of bank branches per 1,000 km ⫺5.979 0.003 ⫺9.718 0.001
Number of bank branches per 0.1 m adults ⫺4.302 0.054 ⫺6.750 0.002
GDP ⫺3.790 0.037 ⫺3.633 0.029
Access ⫺8.799 0.000 ⫺8.799 0.000
Penetration ⫺2.878 0.042 ⫺8.357 0.000
Usage ⫺3.495 0.025 ⫺4.578 0.047
Table II.
Results of the unit Notes: p-values ⬍ 0.05 reject the null hypothesis that the series has a unit root at the 5% level of
root test significance
where GDP is considered as a dependent variable. We have run separate models for Financial
three different dimensions of financial inclusion, that is, penetration, access and usage. inclusion and
Table III demonstrates the results of VAR regression, where the GDP is a dependent
variable and banking penetration and its dimensions are independent variables. Model
economic
1 investigates the relationship between the composite dimension of banking penetration growth
and GDP per capita. The regression result reveals a model fit with a significant F-value.
Banking penetration with two lags confirms a positive and significant association with 27
the economic growth measured in terms of GDP per capita. The R2 value is 93.8 per cent,
and adjusted R2 is 85.7 per cent. The difference between R2 and adjusted R2 values
portrays a good model fit. Lag values of the GDP do not exhibit any significant
association with the current value of the GDP, and therefore, the findings indicate that
the current year’s GDP is not significantly influenced by its past values and that the
model does not exhibit any autocorrelation.
Model 2 breaks down the composite penetration index into the number of deposit
accounts and loan accounts and explores the relationship of these individual indicators
with the GDP. The VAR model exhibits a good model fit with significant F-statistics and
high R2 and adjusted R2 values. Both the number of deposit and loan accounts with two
lag values indicate a positive and significant relationship with economic growth. This
portrays the positive role of banking penetration in the economic growth of a nation and
indicates a lag relationship between the indicators of financial inclusion and economic
growth. The lagged values of banking penetration determine a positive economic
growth. Therefore, the findings support supply-leading hypothesis and finance– growth
nexus in terms of banking penetration and economic growth.
Financial inclusion in terms of the number of deposit and loan accounts leads to
better economic development and growth. This finding is very important because
increasing the number of accounts is the very basic step toward achieving financial
inclusion. The positive association shows that banking penetration is essential in
driving economic growth. Therefore, the government’s effort of enabling people to open

Dependent variable: Ln GDP per capita

Independent variables Model 1 Model 2

Constant 10.558** (1.767) ⫺10.440*** (⫺4.623)

GDP (⫺1) 0.239 (0.487) ⫺0.816 (⫺3.133)
GDP (⫺2) ⫺0.814 (⫺1.187) ⫺1.501 (⫺6.826)
Penetration (⫺1) ⫺0.513 (⫺0.499)
Penetration (⫺2) 1.988** (1.824)
Number of deposit accounts (⫺1) ⫺5.275 (4.012)
Number of deposit accounts (⫺2) 6.5243** (4.70290)
Number of loan accounts (⫺1) 1.134 (2.190)
Number of loan accounts (⫺2) 4.242*** (7.596)
R2 0.938 0.964
Adjusted R2 0.857 0.956 Table III.
F-statistics 11.57*** 7.416*** Vector auto-
AIC ⫺1.817 ⫺5.122 regression model–
gross domestic
Notes: *** , ** and * statistically significant at the 1, 5 and 10% levels, respectively; the values of product and
t-statistics are presented in parentheses penetration
JFEP a bank account with fewer complications is actually an essential step toward providing
8,1 access to banking services. However, it must be kept in mind that the mere opening of
bank accounts (including the no-frill accounts) may lead to a very limited usage of
banking services as observed by Kempson et al. (2004). Although one cannot ignore this,
the opening of bank accounts initiates the flow of money and assists in improving the
economy. The issue with no-frill accounts or dormant accounts has been addressed
28 based on the usage indicators in the relationship model, because the usage indicator
takes account of the role of outstanding deposits and credits to the GDP.
The overall results of Models 1 and 2 reveal evidence of a positive and significant
association of banking penetration dimension along with the number of deposit and loan
accounts and support the financial inclusion– growth nexus.
Table IV presents the results of Models 3-4 and allows us to investigate the
association between economic growth and access to banking services measured in terms
of geographic and demographic availability of bank branches and ATMs. The results
indicate a positive and significant association between economic growth and access.
The VAR models are found to be fit; the F-statistics are significant and there is a
negligible difference between R2 and adjusted R2 values. The results suggest that there
is a positive nexus between the geographic/demographic outreach of bank branches/
ATMs and growth of the Indian economy. These findings are in line with those of Ghosh
(2011) and support the constructive effect of financial outreach on economic
development. The magnitude of this effect is significant in nature. A 1 per cent increase
in various geographic/demographic indicators in the previous year would raise the GDP
per capita to nearly 2-4 per cent (Table IV, regression Models 3-4).
Therefore, the geographic and demographic penetration of banking services in terms
of the availability of bank branches and ATMs drives the wheels of an economy by
providing easy financial access to borrowers and savers. This ultimately results in an
efficient flow of funds and further fosters economic growth. These findings support the
social banking experiment of RBI’s mandate to banks to open branches in rural areas to
nurture financial inclusion and help in the mobilization of funds. The successful
findings of social banking experiments are in line with those of Burgess and Pande
(2005). The easy availability of banking services fosters the movements of cash and
credit and helps the society with the flow of currency.
However, Kamath (2007) has concluded that the role of financial inclusion is
significantly different from that of social banking. Therefore, later models (Models 7 and
8, Table V) have explored the association between the usage of financial services and
growth. Models 7 and 8 (Table V) present the results on the composite dimension of the
usage of financial services measured in terms of outstanding deposits and credit as per
cent GDP. Usage indicates a positive and significant association with the economic
growth with a good regression model fit. The R2 and adjusted R2 values are 94.5 and 87.3
per cent, respectively. This provides a 94.5 per cent explanation of variance in the GDP
by the usage of financial services in the sample data and an 87.3 per cent explanation of
variance in the population. This negligible difference gives evidence of a good
regression model fit. Further, Model 7 reveals a positive and significant association
between the GDP and outstanding deposits. However, outstanding credit does not
reveal any significant association with economic growth. This exhibits that a higher
level of outstanding deposits fosters the economic growth of a nation. However, in the
case of credit, the same cannot be claimed. The underlying reason for this can be
 Dependent variable: Ln GDP per capita
Independent variables Model 3 Model 4 Model 5 Model 6

Constant 13.032** (4.217) 13.146** (16.95) ⫺28.383 (⫺1.733) ⫺17.74 (⫺1.748)

GDP (⫺1) ⫺0.733 (⫺2.151) ⫺0.841 (⫺9462) ⫺0.296 (⫺0.448) 2.340 (1.385)
GDP (⫺2) ⫺0.661 (⫺1.991) ⫺0.362 (⫺4.533) ⫺0.175 (⫺0.283) 3.841 (1.207)
Access (⫺1) ⫺3.685 (⫺2.078) ⫺5.741 (⫺10.673) ⫺1.192 (⫺0.166) ⫺4.371 (⫺0.580)
Access (⫺2) 2.646** (1.365) 4.975** (8.143) 2.547** (1.989) 3.547*** (2.314)
Number of ATMs per 1,000 km (⫺1) 1.662 (5.118)
Number of ATMs per 1,000 km (⫺2) 0.0234** (0.079)
Number of ATMs per 0.1 m adults (⫺1) 2.796 (1.905)
Number of ATMs per 0.1 m adults (⫺2) 0.976** (7.708)
Number of bank branches per 1,000 km (⫺1) ⫺1.586 (⫺0.149)
Number of bank branches per 1,000 km (⫺2) 1.384*** (1.245)
Number of bank branches per 0.1 m adults (⫺1) ⫺10.137 (⫺0.599)
Number of bank branches per 0.1 m adults (⫺2) 1.045** (1.214)
R2 0.976 0.984 0.975 0.945
Adjusted R2 0.966 0.965 0.836 0.824
F-statistics 35.052*** 48.091*** 6.541*** 2.947***
AIC ⫺3.870 ⫺6.526 ⫺2.217 ⫺1.450

Notes: *** , ** and * statistically significant at the 1, 5 and 10% levels, respectively; the values of t-statistics are presented in parentheses
29

Vector auto-
Table IV.
growth
economic
inclusion and
Financial

product and access

gross domestic
regression model–
JFEP Dependent variable: Ln GDP per capita
8,1 Independent variables Model 7 Model 8

Constant 6.137*** (2.599) 6.065*** (1.069)

GDP (⫺1) 0.142 (0.330) 0.010 (0.012)
GDP (⫺2) ⫺0.0423 (⫺0.098) ⫺0.052 (⫺0.029)
30 Usage (⫺1) ⫺0.129 (⫺0.205)
Usage (⫺2) 0.912*** (1.688)
Outstanding credit % GDP (⫺1) 0.006 (0.038)
Outstanding credit % GDP (⫺2) 0.027 (0.178)
Outstanding deposits % GDP (⫺1) ⫺0.019 (⫺0.337)
Outstanding deposits % GDP (⫺2) 0.020*** (0.210)
R2 0.945 0.951
Table V. Adjusted R2 0.873 0.845
Vector auto- F-statistics 13.129*** 3.289***
regression AIC ⫺1.940 ⫺1.554
model– gross
domestic product and Notes: *** , ** and *statistically significant at the 1, 5 and 10% levels, respectively; the values of
usage t-statistics are presented in parentheses

explained in better terms only while taking account of the level of non-performing assets
prevailing in the Indian banking sector. Therefore, our results reveal an insignificant
association of outstanding credit with the economic growth of a nation.
The overall analysis of the VAR model reveals an evidence-based support for the
financial inclusion– growth nexus in India in the short run. These findings are in line
with those of the seminal work of Walter (1873), Schumpeter (1912), McKinnon (1973),
Shaw (1973) and King and Levine (1993). These findings emphasize the vital role of
financial inclusion because it provides easy access of banking services to the common
person at a cheaper rate, which dynamically promotes novelty and growth by efficient
allocation of funds across each section of the society. The access of funds and their
efficient allocation create capital accumulation and productivity improvements, which
ultimately leads to better economic prospects (Levine and Zervos, 1998). These results
can also be interpreted in view of the structure of the Indian financial system, which is
solely a bank-based system. Therefore, the inclusion of the entire society within the
financial system through effective banking penetration and access leads to the ultimate
economic prosperity of a nation.
The country-level analysis suggests that there is a positive and significant
association between financial inclusion and economic growth. However, the literature
provides contradicting results on the direction of causality between finance and growth.
This major conflict is believed to be due to the presence/absence of unidirectional/
bi-directional causality and how this causality can be associated with financial inclusion
(Pradhan, 2010).
To further strengthen the evidence on the financial inclusion– growth nexus, in this
study, we assessed the existence of unidirectional/bi-directional causality between
indicators of financial inclusion and economic growth. In addition, we used VAR
Granger causality/block exogeneity Wald tests. Table VI presents the results of the
VAR Granger causality/block exogeneity Wald tests with two lags; the value of the
optimum lag was selected using the lowest AIC value.
Direction of Chi-square Degree of
Financial
causality statistics freedom Probability inclusion and
economic
Penetration ¡ GDP 3.749 2 0.153
GDP ¡ Penetration 0.133 2 0.935 growth
GDP ¡ Number of deposit accounts 3.249 2 0.197
Number of deposit accounts ¡ GDP 40.894 2 0.000***
GDP ¡ Number of loan accounts 0.260 2 0.877
31
Number of loan accounts ¡ GDP 59.964 2 0.000***
Access ¡ GDP 12.570 2 0.002***
GDP ¡ Access 0.375 2 0.828
ATM per 1,000 km ¡ GDP 27.135 2 0.000***
GDP ¡ ATM per 1,000 km 19.806 2 0.000***
ATM per 0.1m adults ¡ GDP 397.625 2 0.000***
GDP ¡ ATM per 0.1 m adults 0.2188 2 0.896
Branches per 1,000 km ¡ GDP 4.358 2 0.050**
GDP ¡ Branches per 1,000 km 33.003 2 0.000***
Branches per 0.1 m adults ¡ GDP 1.487 2 0.475
GDP ¡ Branches per 0.1 m adults 3.338 2 0.188
Usage ¡ GDP 4.632 2 0.098*
GDP ¡ Usage 2.424 2 0.297
GDP ¡ Outstanding credit (% GDP) 0.070 2 0.965 Table VI.
Outstanding credit (% GDP) ¡ GDP 0.362 2 0.834 VAR granger
GDP ¡ Outstanding deposit (% GDP) 0.219 2 0.896 causality/block
Outstanding deposit (% GDP) ¡ GDP 0.117 2 0.943 exogeneity Wald
tests (number of
Note: *** , ** and * statistically significant at the 1, 5 and 10% levels, respectively lags ⫽ 2)

Banking penetration as a composite index and GDP does not exhibit any causality.
However, the number of deposit accounts and number of loan accounts Granger cause
GDP and demonstrate unidirectional causality. Access to banking services Granger
causes GDP and geographic outreach exhibits a bi-directional causality with economic
growth in line with the findings of Apergis et al. (2007) and Pradhan (2010). This
bi-directional causality reveals that a strong banking infrastructure in terms of
geographic outreach fosters economic growth. Further, a positive economic outlook
creates easy access to banking services and develops the outreach of ATMs and bank
branches. Demographic outreach of ATMs exhibits a unidirectional causality with the
GDP, whereas bank branches exhibit no causality. Findings of the Wald test show that
there is no causality between credit/deposit creation and GDP. However, the usage of
banking services exhibits a unidirectional causality only at a 10 per cent level of
significance.

6. Concluding remarks and policy implications

The objective of this study is to validate the finance– growth nexus in relation to
financial inclusion and economic growth in the emerging Indian economy during
2004-2013. We preferred to study the Indian economy primarily because the Indian
financial system is largely based on banking institutions for the intermediation of funds.
Therefore, financial inclusion in terms of access to the formal banking services by the
society is necessary to attain a holistic economic growth of the nation.
JFEP In this study, we used the VAR model and Granger causality analysis to reveal the
8,1 nexus between financial inclusion and economic prospects. The regression results
confirm the positive and significant association between the various dimensions of
financial inclusion and GDP. Further, Granger causality analysis reveals a bi-directional
causality between geographic outreach and economic growth and a unidirectional
causality between the number of deposit/loan accounts and GDP, although no causality
32 was found between the usage of banking services and economic prospects.
These findings suggest that financial inclusion is a driver of economic growth. The
policy and institutional implication of this study is that financial inclusion and its
various dimensions are found to be the major drivers of an economy. Therefore, the
government and policymakers must look to address policy issues to foster economic
growth through financial inclusion. It is evident from the empirical results and
discussion that banking penetration, availability of banking services and usage of
banking services in terms of deposits lead to a higher economic growth. These findings
also favor the social banking experiment of the Government of India and deepening of
banking institutions. These favorable findings also promote the government’s efforts in
line with inclusive growth such as the recently launched Jan Dhan Yojna scheme and
other initiatives. Therefore, the Indian economy needs similar initiatives and innovative
plans in the future to keep the large populace within the inclusive growth borders. Apart
from the penetration of banking institutions, information dissemination and financial
literacy are also desirable for having a sustainable financial system and growth of the
economy. Policymakers must look to maintain sustainable inclusive growth with the
help of financial inclusion and financial literacy among the society.
The findings of this study also create a new dimension in the finance– growth
nexus, which considers the vital role of financial inclusion in economic growth. We
found that the literature focuses more on the financial development and creation of
finance-related aspects. However, this study reveals the key role of financial
inclusion in the area of financial development. Therefore, it is clear that financial
inclusion is not only an integral part of social banking but also a significant
parameter in the financial development of any economy. Additionally, the academic
implication of this study is that it brings into focus the literature on financial
inclusion as a driver of an economy.
Further, these findings can be vital in understanding the role of financial inclusion in
other bank-based emerging economies, specifically in developing economies, because
they do not have a strong equity market structure to support their financial system.
This study is limited to banking institutions; however, better results may emerge if
SHGs and MFIs are included, because these institutes have a healthier penetration in
rural areas. Future research studies must validate these findings in light of the role of
MFIs and SHGs. This study focuses on the Indian economy, and therefore, the findings
are limited only to the Indian and emerging economies. However, future research must
focus on cross-country analysis to generalize these findings in a broader perspective.

Notes
1. RuPay debit card is India’s first domestic card issued in co-ordination with the National
payment Corporation of India. It can be used in ATM point of sales and e-commerce
transactions in India only.
 2. HDFC Ergo is a leading general insurance company in India, which offers motor, personal, Financial
health and travel insurance, among others products. inclusion and
3. LIC is a leading state-owned life insurance company in India. economic
4. CRISIl Inclusix is an index to measure India’s progress on financial inclusion and is developed growth
by CRISIL, a Standard & Poor’s company. All calculations were based on the data provided
by the RBI.
33
5. Northeast India is the easternmost part of India and is geographically located in the eastern
Himalayas. Due to its disadvantageous geographical location, this region is economically
underdeveloped, and the ratio of current and savings accounts per 100 adults is very low
(Report of the RBI Committee on Financial Sector Plan for NER, 2006).

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Corresponding author
Dipasha Sharma can be contacted at: dipashasharma20@gmail.com

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