Relationship between financial inclusion and financial development in India: Is there any link?

• Published date: 01 December 2022
• Author: Sanjaya Kumar Lenka
• Date: 01 December 2022
• DOI: http://doi.org/10.1002/pa.2722

RESEARCH ARTICLE

Relationship between financial inclusion and financial

development in India: Is there any link?

Sanjaya Kumar Lenka

Department of Economics, School of Social

Sciences, CHRIST (Deemed to be University),

BGR Campus, Bannerghatta Main Road,

Hulimavu, Bengaluru, Karnataka, 560076, India

Correspondence

Sanjaya Kumar Lenka, Department of

Economics, CHRIST (Deemed to be

University), Bengaluru, Bannerghatta Main

Road, Hulimavu, Bengaluru - 560 076,

Karnataka, India.

Email: sanjaya.iitindore19@gmail.com

A dynamic chain of financial activities and services can be served from debtors to

creditors in the international economy through an efficient and effective financial

sector. The motivation behind this study is to investigate the linkages between finan-

cial inclusion and financial development in India during the period (1980–2017). For

this, the study employ principal component analysis (PCA) to construct both financial

inclusion index and financial development index which measures financial access and

financial depth position respectively. Using a set of determinants related to financial

inclusion and financial development, the present study estimates there is a unidirec-

tional relationship between financial inclusion and financial development in India. So,

it reveals that financial inclusion is an essential element for financial sector develop-

ment especially in a developing country like India.

KEYWORDS

financial development, financial inclusion, India, principal component analysis

1|INTRODUCTION

It is well recognized that both financial inclusion and financial develop-

ment are an integral part of economic growth for every nation across

the globe, and a well-developed financial system provides better finan-

cial services which will promote economicgrowth. The flow of financial

resources from debtors to creditors can be possible through sound

financial systems. So, the banking personnel and policy makers aim to

improve financial access to every section of the society transparently

for sound financial systems (Ang, 2008). In the general sense, financial

development is a multidimensional concept which defines the develop-

ment of financial institutions, financial markets, andinternational capital

flows which will work together to reduce the cost of information,

enforcement, and transactions. Whereas, the mottoof financial inclusion

is to provide available and affordable financial services reliably and

transparently to all sections of the society. It is intended to connectpeo-

ple to banks with consequential benefits (Swamy, 2014). It looks at

bringingunbanked people intothe banking fold so thatthey have access

to institutional creditand other services offered by commercial banks. A

solid and well-functioning of both financial development and financial

inclusion are a powerful engine behind economic growth. The consen-

sus is that finance (both financial inclusion and financial development)

promotes economic growth but the magnitude of impact differs. Both

concepts are inseparable from each other. It has been observed that

countries might have financially developed but not always financially

inclusivedue to high-incomeinequalities and certain segmentsof people

remain outside the formal financial systems (Sarma, 2008). But the

financiallyinclusive countrymay be financiallydeveloped.

So the paper aims tomeasure both financial inclusionand financial

development in different parameters collected both from financial

institutions and financial markets. Thus, the study provides a holistic

measurement of both financial inclusion and financial development,

which is the first contribution of this study. Secondly,this study tries to

establish the interrelationship between financial inclusion and financial

developmentin India, which is a unique contribution to the literature.

2|REVIEW OF LITERATURE

2.1 |Linkages between financial inclusion and

financial development

Numerous academic literature, the role of both financial inclusion and

financial development with economic growth has analyzed separately

Received: 11 September 2019 Revised: 5 May 2021 Accepted: 5 July 2021

DOI: 10.1002/pa.2722

J Public Affairs. 2022;22(Suppl. 1):e2722. wileyonlinelibrary.com/journal/pa © 2021 John Wiley & Sons Ltd. 1of10

https://doi.org/10.1002/pa.2722