Association between Financial Inclusion and Economic Growth in India: A Co-Integration Approach

Abstract

This paper examines the association between financial inclusion and economic growth in the context of the Indian economy. The Auto Regressive Distributive Lag (ARDL), Error Correction Mechanism (ECM), and impulse response function have been used for establishing the association between the two. Using panel data regression over the time period 2001 to 2019, the paper shows that there exists a positive, bidirectional association between financial inclusion and economic growth in the long run. However, there is a unidirectional relationship in the short run, i.e., only economic growth is the precondition for financial inclusion. Therefore, in the long run, economic growth helps to remove demand and supply side obstacles while financial inclusion reduces poverty and inequality, and hence promotes inclusive growth.