Nexus between financial inclusion and economic growth

Abstract

Purpose The purpose of this study is to assess the nexus between the vast dimensions of financial inclusion and economic development of the emerging Indian economy. Design/methodology/approach In this study, vector auto-regression (VAR) models and Granger causality test were followed to test the main research question in Indian context. The data were collected on various dimensions of financial inclusion and economic development for the period 2004-2013. Findings Empirical results and discussion suggest that there is a positive association between economic growth and various dimensions of financial inclusion, specifically banking penetration, availability of banking services and usage of banking services in terms of deposits. Granger causality analysis reveals a bi-directional causality between geographic outreach and economic development and a unidirectional causality between the number of deposits/loan accounts and gross domestic product. The results obtained favor social banking experiments in India with a deepening of banking institutions. Research limitations/implications This study is limited to the banking institutions and specifically to the emerging and developing economies. Practical implications This study analyzes the quantitative value of social banking experiments and governments’ efforts to enhance financial inclusion in terms of economic growth. Social implications Financial inclusion plays a key role in developing a strong and an efficient financial infrastructure, which facilitates the growth of an economy. The findings of the study reveal that there is a strong association between banking penetration and growth. The discussion leads in the favor of deepening of the banking institutions, and therefore, policymakers can look forward to these findings to maintain a sustainable-inclusive-developed economic system in an emerging economy like India. Originality/value This study is original in nature and includes recent evidence and efforts to promote financial inclusion in the Indian economy. The findings of this study will be of value to banks and policymakers.