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Financial inclusion matters for economic growth in India

Author

Listed:
  • Dinabandhu Sethi
  • Susanta Kumar Sethy

Abstract

Purpose - The purpose of this paper is to examine the relationship between financial inclusion (FI) and economic growth in India. Design/methodology/approach - To measure FI, a multidimensional time-varying index is proposed following the Human Development Index method. The long-run relationship between FI and economic growth is examined by using the autoregressive distributed lag (ARDL) approach to cointegration and nonlinear ARDL approach. Further, the direction of causality is investigated by employing the Toda–Yamamoto Granger causality test. Findings - The linear cointegration test confirms a long-run relationship between FI and economic growth for India. The improvement in both demand-side and supply-side financial services has a positive impact on economic growth. These results suggest that India can attain long-run economic growth by improving the coverage of FI. However, there is no evidence of nonlinear cointegration, indicating that there is no asymmetric effect of FI on economic growth. Further, the causality test shows that FI granger causes economic growth but not vice versa. Research limitations/implications - The major limitation of the study is the availability of time series data for all important variables. The index for both demand- and supply-side indicators can be extended with several other important variables in later date once the data are available for those variables. Practical implications - As the study confirms that FI is one of the main drivers of economic growth, it is suggested that the policy maker emphasizing on financial sector reforms can enjoy economic growth in the long run, especially in developing countries. Therefore, the government and policy makers need to address the issues involved in access to financial services to spur economic growth. Originality/value - The study examines the long-run relationship between FI and economic growth employing ARDL bound testing approach and nonlinear ARDL approach, separately for demand-side and supply-side indicators. Further, the study uses the Toda–Yamamoto granger causality to find the direction of causal flow between FI and economic growth.

Suggested Citation

  • Dinabandhu Sethi & Susanta Kumar Sethy, 2018. "Financial inclusion matters for economic growth in India," International Journal of Social Economics, Emerald Group Publishing Limited, vol. 46(1), pages 132-151, August.
    • Handle: RePEc:eme:ijsepp:ijse-10-2017-0444
    DOI: 10.1108/IJSE-10-2017-0444
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    Citations

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    Cited by:

    1. Yadava, Anup Kumar & Singh, Bhanu Pratap & Yadav, Vishal, 2021. "Nexus of Financial Inclusion and Economic Growth: Benchmarking the Performance of Indian States," MPRA Paper 108479, University Library of Munich, Germany.
    2. Murshed, Muntasir & Apergis, Nicholas & Alam, Md Shabbir & Khan, Uzma & Mahmud, Sakib, 2022. "The impacts of renewable energy, financial inclusivity, globalization, economic growth, and urbanization on carbon productivity: Evidence from net moderation and mediation effects of energy efficiency," Renewable Energy, Elsevier, vol. 196(C), pages 824-838.
    3. Betgilu Oshora & Goshu Desalegn & Eva Gorgenyi-Hegyes & Maria Fekete-Farkas & Zoltan Zeman, 2021. "Determinants of Financial Inclusion in Small and Medium Enterprises: Evidence from Ethiopia," JRFM, MDPI, vol. 14(7), pages 1-19, June.
    4. Bhanu Pratap Singh & Annu Kumari & Tanya Sharma & Abhishek Malhotra, 2021. "Financial inclusion, Pradhan Mantri Jan Dhan Yojna Scheme and economic growth: Evidence from Indian States," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(3), November.
    5. Yakubu, Ibrahim Nandom & Bunyaminu, Alhassan, 2021. "Financial Inclusion and Economic Growth in West Africa: The Moderating Effect of Financial Openness," MPRA Paper 115183, University Library of Munich, Germany.
    6. Pradhan, Rudra P. & Arvin, Mak B. & Nair, Mahendhiran S. & Hall, John H. & Bennett, Sara E., 2021. "Sustainable economic development in India: The dynamics between financial inclusion, ICT development, and economic growth," Technological Forecasting and Social Change, Elsevier, vol. 169(C).
    7. Lee, Chien-Chiang & Wang, Chih-Wei & Ho, Shan-Ju, 2020. "Financial inclusion, financial innovation, and firms’ sales growth," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 189-205.
    8. El-Bourainy Mehry & Salah Ashraf & ElSherif Marwa, 2021. "The Impact of Financial Inclusion on Unemployment Rate in Developing Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 11(1), pages 79-93.
    9. Susanta Kumar SETHY & Phanindra GOYARI, 2022. "Measuring financial inclusion and its present status in South Asian countries. Evidence from a multidimensional Financial Inclusion Index," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(632), A), pages 131-150, Autumn.
    10. Bhanu Pratap Singh & Anup Kumar Yadava, 2022. "Technical efficiency of financial inclusion and human development: Insights from the Indian states," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 51(2), July.

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    Keywords

    ARDL; Economic growth;

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