Industrialization, Digital Financial Inclusion and Growth: A Subnational Level Study

This study explores how industrialization has influenced the growth of digital financial services across 29 Indian states and subsequently affected growth. While much existing research looks at how digital tools help industries grow, this study focuses on the opposite—whether industrial development can drive the adoption of digital financial services. To investigate this, we create composite indices for industrialization, digital financial inclusion, financial inclusion, and infrastructure through Principal Component Analysis. We then use System GMM to estimate dynamic panel models to understand how industrialization affects digital financial inclusion and how together they boost economic growth. The results reveal that the states with stronger industrial bases tend to have higher levels of both digital financial activity and economic growth. Moreover, once the states reach a certain level of industrialization, there is a positive and significant impact on digitalization on growth. Similarly, at a given level of digitalization industrialization has a positive and significant impact on digitalization. Thus, the industrialization as well as digitization go hand in hand to foster economic growth. These findings indicate that to get a better effect of industrialization, digitalization is essential and vice versa. This can explain the disparity across states in terms of digitalization and subsequently reflecting in variation in growth performance. The study emphasizes the importance of industrial growth with investments in digital and financial infrastructure.