Developing a Comprehensive Financial Inclusion Index

Abstract

In spite of efforts of six and half decades, poverty reduction in the country is not in sight. Rightly therefore, the 11th and 12th Five-Year Plans focus on inclusive growth. In order to compare the performance of different states or regions, a comprehensive measure of financial inclusion is necessary which takes into account all its aspects. Review of literature on the subject reveals that measures so far suggested take into account only the supply side. This article suggests a measure taking into consideration supply, demand and infrastructure dimensions. It also takes into account the factors such as population growth, law and order situation and corruption, which have adverse impact on the factors which lead to financial inclusion. These adversely impacting factors are termed as drag. Separate indices are developed for three dimensions, namely, supply, demand and infrastructure, and a composite index of these three dimensions is computed. Also an index of drag factors is calculated. A comprehensive financial inclusion index is arrived at by modifying the former index by giving the effect of impact of drag. The index developed is comprehensive as well as flexible, in the sense that new parameters can be added to any of the dimensions including the drag, depending upon identification of parameter and availability of data. It is most suited to Indian conditions and can be used to measure comparative performance of Indian states or sub-regions of the states. It is also applicable to developing countries in general. The composite index is developed by using displaced ideal method which satisfies intuitive criteria of development index, namely, normality, anonymity, monotonicity, proximity, uniformity and signalling, collectively referred to with the acronym NAMPUS.