Multidimensional financial inclusion index for Indian states

Abstract

The study proposes a multidimensional financial inclusion index (FII) for 27 Indian states. The separate demand and supply FII is constructed across the states for the period 2004–2017. The Human Development Index (HDI) methodology developed by the United Nation Development Programme (UNDP) is adopted in the construction of current FII. After the launch of Pradhan Mantri Jan Dhan Yojna (PMJDY) in 2014, there is no study in the Indian market attempted to examine the status of financial inclusion across the states over a longer period. The current study fills this gap by proposing the demand and supply FII. The major findings of the study show that the level of FII measure tends to indicate marginal improvement in the level of financial inclusion across states during 2004–2017. Most of the northern and north‐eastern states were found to be under low financial inclusion. On the other hand, most of the high financially included states were also better in terms of HDI and literacy. Further, PMJDY was unable to augment financial inclusion across the states because of marginal impact of the scheme which helped only a few states to move from low to medium FII states. On the contrary, the rise in the dormant account, low HDI and illiteracy across the majority of the states were the major reason behind the failure of PMJDY. Hence, structural reforms are warranted in the policy framework to provide financial services to poorest among the poor at low or no cost for better economic outcomes.