Does social identity constrain rural entrepreneurship? Evidence on the role of financial inclusion

This paper examines whether improved financial access can mitigate the constraints imposed by social identity on entrepreneurship among under-privileged caste groups in India. Using a novel dataset on Indian villages and their proximity to bank branches, we find that closer access to a bank branch significantly enhances entrepreneurial activity among Scheduled Castes (SCs) in non-agricultural sectors, especially in those sectors that are traditionally dominated by upper-caste groups. These findings are more pronounced in villages where the improvement in proximity was plausibly exogenous, resulting from the RBI's Bank Branch Expansion Policy of 2005. For Scheduled Tribes (STs), however, financial access is associated with a gain in the size of hired employment within enterprises. Exploring several mechanisms, we find that these effects are primarily driven by credit uptake. Overall, our findings highlight the potential of financial inclusion in breaking rigid social norms around the entrenched caste-based occupational segregation and promoting more equitable economic participation in India.