Impact of Formal Financial Services on Per Capita Income in India: Evidence from Regression and Causality Approach

Abstract

The main purpose of this paper was to examine the impact of formal financial services on per capita income in India from 2004 to 2018. The study used a regression approach to find the impact of formal financial services on per capita income. The Toda-Yamamoto Granger causality test was used to find the direction of causality between formal financial services and per capita income. The empirical findings of this study confirmed that formal financial services had a positive and statistically significant impact on per capita income. These results suggested that India can increase per capita income by improving the coverage of formal financial services. Further, the causality test confirmed that a unidirectional causal relationship was found running from formal financial services (such as the number of ATMs per 1000 km2, deposit accounts with commercial banks, and outstanding deposits with commercial banks) to per capita GDP. Formal financial services are one of the main drivers of per capita income. Policymakers must emphasize financial sector reforms and create awareness about financial services and financial literacy to increase per capita income in the long run, especially in developing countries.