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org © 2020 IJCRT | Volume 8, Issue 11 November 2020 | ISSN: 2320-2882

Role of Financial Inclusion in the Economic growth

of India
Devendra Prasad Sah
Assistant Professor
Dept. of Commerce
G.K.P.D. College, Karpurigram
Samastipur
Abstract
Financial inclusion or inclusive financing is the delivery of financial services to
sections of low income segments of society. A nation can grow economically and socially if
its weaker section can turn out to be financial independent. The study focuses on the role of
financial inclusion, in strengthening the India’s position in relation to other countries
economy. After analyzing the facts and figures it can be concluded that undoubtedly financial
inclusion is playing a vital role for the economic and social development of society but still
there is a long road ahead to achieve the desired outcomes. Financial inclusion is the process
that ensures the ease of access, availability, and usage of formal financial system for all
members of an economy. Financial inclusions can be voluntary versus involuntary exclusion
and it is however important to distinguish between voluntary versus involuntary exclusion.
India is considered as largest rural populations in the world and belongs to agriculture
activities; financial inclusion is aimed at providing banking and financial services to all
people in a transparent and equitable manner at reasonable cost.
Keywords: Financial Inclusion, Financial Services, Economic Development, Social
Development.

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Introduction
Financial inclusion has been a efficient tool of high priority which helps in socio
economic development of a country like India which is still a developing country. It helps in
reducing poverty, financial exclusion and making awareness among people to how to utilize
their savings. It is a key for socio-economic development. Thereby it can be said that for
enhancing inclusive growth of a country financial inclusion is in essential process that’s
reason why financial inclusion is important for any country for its growth. However, if a
customer is well educated financially, he can make better choices regarding various financial
services and products that can fulfill his individual needs. This will result in overall growth of
the country as access to financial services at affordable cost will improve life of the poor.
Financial inclusion has not effectively promoted stable financial and marketing support
to the economic system in developing economy in terms of poverty reduction. Strong returns
on commercial bank branches in rural area can stimulate economic growth through increase
in agricultural product and risk reduction. The establishment of commodity market may solve
some of the uncertainty problems, transaction costs and information problems between sellers
and buyers of agricultural products and thus allow for a more efficient allocation of
investments that will encourage economic growth and reduce poverty. Moreover, empirical
studies have shown repeatedly that financial inclusion will drive economic development
through investment if properly managed and active ATMs are implemented. Also bank
lending to rural dwellers has not positively causes economic growth and poverty reduction;
therefore, any attempt made by banks to fully finance agriculture in developing economy
should be encouraged with attention to inflation and bank lending rates.
Financial Inclusion is considered to be the core objective of many developing nations since
from last decade as many study correlate the direct link between the financial exclusion and
the poverty prevailing in developing nations. Financial inclusion or inclusive financing is the
delivery of financial services, at affordable costs, to sections of disadvantaged and low
income segments of society. There have been many formidable challenges in financial
inclusion area such as bringing the gap between the sections of society that are financially
excluded within the ambit of the formal financial system, providing financial literacy and
strengthening credit delivery mechanisms so as to improvised the financial economic growth.
According to World Bank report “Financial inclusion, or broad access to financial services, is
defined as an absence of price or non price barriers in the use of financial services.” The term
Financial Inclusion needs to be interpreted in a relative dimension. Depending on the stage of
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development, the degree of Financial Inclusion differs among countries. It has been
surprising fact that India ranks second in the world in terms of financially excluded
households after china .For the inclusive growth process of economy the central bank has
also provided high importance to the financial inclusion. Normally the weaker sections of the
society are completely ignored by the formal financial institutions in the race of making
chunks of profits or the complexities involved in providing finance to the weaker section.
Thus the term Financial Inclusion is the process of ensuring access to financial services and
timely and adequate credit where needed by vulnerable groups such as weaker sections and
low income groups at an affordable cost.
One of the origin of financial inclusions and poverty reduction history can be traced to
the developing Asia’s success stories is its sustained economic expansion which lifted
millions out of poverty. However, it becomes obvious that poverty remains a stubborn
challenge in most developing economy. Financial inclusion is critical as increasing the poor’s
access to financial services is often considered as an effective tool that can help reduce
poverty and lower income inequality. The issue of access to financial services for the rural
dwellers in every country in terms of development, poverty reduction, decent work and
economic empowerment has received growing attention from scholars and policy makers as it
concern financial inclusion. In Banking and Finance area, financial inclusion can be seen as
the delivery of financial services at affordable costs to some disadvantages and low income
segment of the economy, in contrast to financial exclusion where those services are not
available or affordable.
In spite of the importance of financial inclusions in any economy, financial inclusions,
poverty reduction and economy growth modeling has been in the mainstream of econometric
research in developing economy. There has been no model designed to determine the relative
impact of financial inclusions, poverty reduction, population and economy growth and their
possible linkages with the real or productive sector of the economy. Since the global financial
meltdown of 2008, no consensus has been reached by scholars as regards the impacts of
financial inclusions and poverty in developing economy. Therefore, there is the need for
empirical work to be done in this area. Although financial inclusion has become topical on
the global policy agenda for sustainable development, economic literature on financial
inclusion is still in its infancy. Most studies have looked into the appropriate measures of
financial inclusion both at household and country levels, while some academic scholars
focused on the role of financial access in lowering poverty and income inequality.
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Financial inclusion status in India:
The status of financial inclusion in India has been assessed by various committees in
terms of her people’s access to avail banking and insurance services. Only 34% of the India’s
population has access to banking services. The Eleventh Five Year Plan (2007-12) envisions
Inclusive growth as a key objective. Achieving inclusive growth in India is the biggest
challenge as it is very difficult to bring 600 million people living in rural India into the
mainstream. One of the best ways to achieve inclusive growth is through financial inclusion.
The process of financial inclusion in India can broadly be classified into three phases. During
the First Phase (1960-1990), the focus was on channeling of credit to the neglected sectors of
the economy. Special emphasis was also laid on weaker sections of the society. Second Phase
(1990-2005) focused mainly on strengthening the financial institutions as part of financial
sector reforms. Financial inclusion in this phase was encouraged mainly by the introduction
of Self- Help Group (SHG)-bank linkage programme in the early 1990s and Kisan Credit
Cards (KCCs) for providing credit to farmers. The SHG-bank linkage programme was
launched by National Bank for Agriculture and Rural Development (NABARD) in 1992,
with policy support from the Reserve Bank, to facilitate collective decision making by the
poor and provide ‘door step’ banking. During the third Phase the ‘financial inclusion’ was
explicitly made as a policy objective and thrust was on providing safe facility of savings
deposits through ‘no frills’ accounts. The Report Committee on Financial Inclusion headed
by Dr.C. Rangarajan has observed that financial inclusion must be taken up in a mission
mode and suggested a National Mission on Financial Inclusion (NMFI) comprising
representation of all stakeholders for suggesting the overall policy changes required, and
supporting stakeholders in the domain of public, private and NGO sectors in undertaking
promotional initiatives.
Financial Inclusion and Economic Growth in India
The Indian growth story started unfolding with the IT Sector in the late ’90s. Since
then the Indian economy has been going from strength to strength. Today India is the second-
fastest-growing economy in the world. The crossing of Indian GDP to over a trillion-dollar
mark in 2007 is considered an important milestone. Today India’s economy is the 3rd largest
in the world by purchasing power parity.
Of late, the service sector is contributing to more than half of India’s GDP. This is a
very healthy sign. The tremendous growth rate has coincided with a better all-round
performance. Indian entrepreneurs have registered noticeable global presence not only in IT
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and ITES and knowledge-based services but also in world-class manufacturing capabilities be
it steel, or aluminum or refinery or anything else. The main drivers of the Indian growth story
are domestic consumption, service sector, high tech capital intensive industry, human capital,
natural resources, and so on. The success of India’s Economy is market-led and entrepreneurs
are at the forefront.
Role of Financial Inclusion in Indian Economy
The financial system serves as a catalyst for economic development. The formal
financial channels collect savings and idle funds and distribute such funds to entrepreneurs,
businesses, households and government for investment projects and other purposes with a
view of a return. This forms the basis for economic development in modern economic theory.
It also assists in managing the risks faced by firms and businesses, improvement of
portfolio diversification, availability of a variety of financial instruments to suit the varied
needs of the businesses, people and shock-absorbing capacity from external economic
changes. Additionally, the system provides linkages for the different sectors of the economy
and economies of scale.
Measuring Financial Inclusion
One of the measures of the level of financial inclusion is the Financial Inclusion Index.
This index is based on three basic dimensions of an inclusive financial system.
 Banking Penetration: Banking penetration is definitely the most critical parameter for
measuring the depth financial inclusion and is measured as a ratio of bank accounts to
the total population.
 Availability of the Banking Services: The second parameter, availability of banking
services provides an indication to the number of bank outlets available per 1000 people
to deliver financial services. The bank outlets may include the brick and mortar
branches, ATMs, business correspondents, etc
 Usage of the Banking System: The third parameter seeks to determine the usage of
banking services going beyond mere opening of accounts. Therefore, this is evaluated
on the basis of outstanding deposits and credits. Accordingly, the volume of
outstanding deposit and credit as proportion on the net district domestic product is used
for measuring this dimension.
According to the value of the index, Indian States can be classified into three
categories, i.e., states having high, low and medium extent of financial exclusion. According
to the empirical results, Kerala, Maharashtra and Karnataka are some of the States having
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wider extent of financial inclusion as compared to other States of India. Tamil Nadu, Punjab,
Andhra Pradesh, Himachal Pradesh, Sikkim and Haryana fall under the category of medium
financial exclusion evaluated on the basis of outstanding deposits and credits. Accordingly,
the volume of outstanding deposit and credit as proportion on the net district domestic
product is used for measuring this dimension. According to the value of the index, Indian
States can be classified into three categories, i.e., states having high, low and medium extent
of financial exclusion. According to the empirical results, Kerala, Maharashtra and Karnataka
are some of the States having wider extent of financial inclusion as compared to other States
of India. Tamil Nadu, Punjab, Andhra Pradesh, Bihar, Himachal Pradesh, Sikkim and
Haryana fall under the category of medium financial exclusion.
Conclusion
After analyzing the facts and figures it can be concluded that undoubtedly financial
inclusion is playing a vital role for the economic and social development of society but still
there is a long road ahead to achieve the desired outcomes. Financial Inclusion has not
yielded the desired results and there is long road ahead but no doubt it's working on the
positive side.The financial system plays the role of inter-mediation and acts as a buffer in the
mobilization and allocation of savings for productive activities in an economy. Managing the
financial liquidity to avoid inflationary pressures and to flush out enough liquidity to sustain
the growth are the functions of financial systems. For standing out on a global platform India
has to look upon the inclusive growth and financial inclusion is the key for inclusive growth.
Today the fact remains that nearly half of the Indian population doesn't have access to formal
financial services and are largely dependent on money lenders. A nation can grow
economically and socially if it’s weaker section can turn out to be financial independent.
References
1. Allen, F., (2013), Resolving the African Financial Development Gap: Cross-Country
Comparisons and a Within-Country Study of Kenya. World Bank Policy Working
Paper No. 6592. Washington, DC., p. 105
2. Burges and Pandey (2005), Do Rural Banks Matter? Evidence from the Indian Social
Banking Experiment. American Economic Review, p. 178.
3. Gompers, Paul A., (2001), “Institutional Investors and Equity Prices,” Quarterly
Journal of Economics, IV, p. 162.
4. Alexander Massara, (2014), Assessing Countries’ Financial Inclusion Standing-A New
Composite Index. IMF Working Paper, p. 30
5. Gujarati, D. N., (2009), Basic Econometrics, Ninth Edition, McGraw-Hill., Singapore.
p.103.

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