See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/329450615

Developing a financial inclusion index and inclusive growth in India

Article in The Indian economic journal: the quarterly journal of the Indian Economic Association · December 2018
DOI: 10.1177/0019466220150210

CITATIONS READS

41 2,389

1 author:

Susanta KUMAR Sethy

University of Hyderabad
7 PUBLICATIONS 99 CITATIONS

SEE PROFILE

All content following this page was uploaded by Susanta KUMAR Sethy on 13 December 2018.

The user has requested enhancement of the downloaded file.

Theoretical and Applied Economics FFet al
Volume XXIII (2016), No. 2(607), Summer, pp. 187-206

Developing a financial inclusion index

and inclusive growth in India
Susanta Kumar SETHY
University of Hyderabad, India
susanthu2010@gmail.com

Abstract. Financial inclusion is one of the systems through which Inclusive Growth can be
achieved in developing countries like India where large sections are unable or hopeless to
contribute in the financial system. An inclusive financial system mobilizes more resources
for productive purposes leading to higher economic growth, better opportunities and
reduction of poverty. This study, proposed an Index of financial inclusion – a
multidimensional measure. The Financial Inclusion Index can be used to compare the
range of financial inclusion across different economies and to monitor the progress of the
economies with respect to financial inclusion over time. From the computation of Financial
Inclusion Index of India, it is evident that during 2010 to 2012 (Demand side dimensions
such as: banking penetration, availability of banking services, usage of the banking
system), India is categorised under the full financial inclusion or high financial inclusion
and during 1987-1988 and 1989-2009 (Supply side dimensions such as: access to saving,
access to insurance, bank risk), India is categorised under the low financial inclusion.
Here, the major difference between the demand side and supply side indicators of Financial
Inclusion Index during the period 2010 to 2012 is that, the India is categorised under the
high financial inclusion in case of demand side dimensions but low financial inclusion in
case of supply side dimensions.

Keywords: Financial Inclusion, Inclusive growth, Financial System.

JEL Classification: O43, O430, G21.

188 Susanta Kumar Sethy

1. Introduction
Financial inclusion holds the promise of boosting growth and reducing poverty and
inequality, notably by mobilizing savings and providing households and firms with
greater access to resources needed to finance consumption and investment and to insure
against shocks. In addition, financial inclusion can foster labour and firm formalization,
helping, in turn, boost government revenues and strengthen social safety nets.
‘Financial Inclusion’ is the buzzword of the current era. It has become the most important
phrase in the lexicon of economics. It has drawn the attention of a large section of the
intelligentsia: scholars, researchers, economists, policymakers, bankers and of course
academia. It has generated a keen interest in the development circles too. Policymakers
and central bankers from around the world gather in different forums to discuss ‘Financial
Inclusion’ and to build a more financially inclusive economic system. It is widely
regarded as a policy priority and need to be taken care of immediately, to achieve an
equitable and viable growth. Hence, it has become the focus of intense intellectual debate
and economic-policy making all over the world.
Financial Inclusion is one of the yardsticks to measure the growth of an economy as well
as human welfare. It is a key enabler of economic and social development. The word
“Financial Inclusion” is not the recent development in the policy initiatives taken by the
government of India. There has been some effort made in 1904 and later more effectively
in 2000, during the beginning of co-operative movement in India. Since then, Indian
financial system has gained momentum rapidly but its benefit has been in few pockets. In
spite of that the rapid development in expansion of banking infrastructure and financial
products, the poorer sections have remained untouched to the financial services.
To make an effective and inclusive financial system is an important plan of action;
however it is not an easy task. It is because; measuring financial inclusion by the creation
of an index or a set of Indices is a herculean task. The existing literature on measuring
financial inclusion has not been too comprehensive and has not captured selective
important aspects of financial services. Against this backdrop, the present research makes
an effort not only to study the concept of financial inclusion, its important facets but also
to suggest the construction of a new Index or a set of Indices (for a more inclusive policy
on Financial Inclusion).

2. Literature Review
Different approaches have been proposed in the literature including the use of a variety of
financial inclusion dimensions to econometric estimation. One of the first efforts at
measure financial sector outreach across countries was done by Beck et al. (2006). The
authors designed new indicators of banking sector outreach for three types of banking
services-deposits, loan and payments (access, affordability, and eligibility). Combining
these elements to evaluate overall progress skilled by countries can be complicated.
Sarma, M. and Paise, J. (2008) did a study to find out the co-relation between financial
inclusion and human development. Within 49 countries data on banking services, he
Developing a financial inclusion index and inclusive growth in India 189

found that high financial inclusion can lead human development. So it can be argued that
financial inclusion is policy initiatives which can reduce poverty and improve standard of
living. Further he stated that high income can lead to a high level of financial inclusion.
Mehrotra, et al. (2009), constructed a Financial Inclusion Index (FII) to measure the level
of financial inclusion and then try to find out the relation between financial inclusion and
economic growth. Their argument is that, when people access to banking services it
benefits them to park their money in the formal financial institutions. This results in high
growth through multiplier effects which in other words helps to achieve an inclusive
growth.
Chakravarty and Pal (2010), have very recently presented a set of matrices for measuring
financial inclusion. In what they call as an axiomatic approach, they consider data from
Beck et al. (2007) which reported eight indicators of financial inclusion. Their work is
two folds. In the first stage they calculated the level of financial inclusion in 21 countries
including India for different income groups. They stated that, to achieve the high level of
financial inclusion, the factors of banking services have contributed equally to that
success. At the state level, most of the states have experienced low financial inclusion
during the period of 1991 to 2001. Interestingly, for the period of 2001 to 2007, the level
of financial inclusion has increased in Indian states. Laha and Kuri (2011), conducted a
study to observe the level of financial inclusion in India, two composite financial
inclusion indices; they are constructed separately for demand side and supply side
information of financial services. The study concluded by identifying the empirical result,
which suggests a large difference between rural and urban regions in the access of
financial services on both sides in India. In the existence of a significant association
between the demand for and supply of financial services, the study suggest for evolving
an integrated approach influencing the demand and supply dimensions so as to promote
the strategy of complete financial inclusion in India.
Chattopadhyay (2011) have studied the efficacy of financial inclusion in West Bengal
(WB). For that, he has compared the performance of WB among all other Indian states
and then a survey has been done in selected districts of WB. In comparing the
performances, the WB has scored a very low level of financial inclusion. In the Financial
Inclusion Index, Maharashtra has scored the highest level of achievement in financial
inclusion. He argued that, after 2005 to 2006, there has not been any measure success in
financial inclusion. Considering the district level study, it is confirmed that financial
inclusion is not speeded over all the rural areas. Money lender still dominants rural
informal credit market (Chattopadhyay, 2011).
Gupte et al. (2012), has used more updated data base to study the impact of financial
inclusion India. By showing the major draw backs in the previous studies, a Financial
Inclusion Index (FII) was constructed. In the result he found that, the financial inclusion
has increased from the period of 2008 to 2009. This improvement has been mainly due to
the contribution of some important demand side factors. By comparing the results of
Sharma, he concluded that, the level of financial inclusion has declined for the same
period. Yorulmaz (2013) used three dimensions of financial inclusion to measure the
coverage of financial inclusion Turkey. He used similar kind of methodology as Sharma
190 Susanta Kumar Sethy

used to calculate FII. From the result it is evident that the high income region has
performed well in the Index. In other words high income groups have better access to
banking services in Turkey. In the Turkey region, Istanbul has scored highest rank in FII,
whereas mid-east Anatolia has performed very low level of financial inclusion.
Piñeyro (2013) has studied the level of financial inclusion in 32 states of Mexico and its
Municipality. Using principal component analysis, he found that around 36 percent of
Municipality are financial inclusive whereas 29 percent of them are still excluded. He
also found a direct relationship between education and financial inclusion and to some
extent the high correlation between poverty and financial inclusion. Thus he suggested
that in order to benefit a large mass of excluded population, Mexican government should
encourage equitable growth and equal opportunities.
Thakkar (2014) in his article, identified the level of financial inclusion in India within the
BRICS economies and the study also intended to analyse the level of financial inclusion
in India vis-à-vis other emerging economies. His study was based on six selected demand
side indicators. Through his study, he found out that the financial inclusion in India is
very low within the BRICS economies.
The above review of literature on the various Index/Indices of financial inclusion opens
up the debate that these Index/Indexes are necessary but not sufficient for an all-inclusive
idea called financial inclusion. The various Indices/Indices give an idea about the
limitation of the reach of the various programmes of financial inclusion to the different
segments of the population. It suggests that for a more inclusive policy on financial
inclusion one needs to think about constructing a new Index/Indices apart from the
various Index/Indices discussed above.

3. Origin of the Theory

First time a classical economist named as Walter Bagehot (1870)(1), who pointed out a
new theory under which the financial system of an economy is of most important for
economic growth. According to him loanable funds are encouraging economic activity.
First loanable funds are allocated among investors and next it will be encourage to
adopting new technology. Finally the production process of an economy will be increase.
As a result, gradually this process spill over the whole economy. Credit goes to
Goldsmith (1975), for pioneering explicitly the index of financial inclusion as Financial
Interrelation Ratio. He explained about the penetration of financial system in terms
number of branches, customers etc., which has gained lot of significance in today’s time.
For the first time some geographers propounded the term financial exclusion in 1993,
where they explain that the closing of bank branches are the reasons for limited access to
bank services (Leyshon and Thrift, 1995).
In India, the term financial inclusion was given preliminary importance during
cooperative movement. However, the term “Financial Inclusion” was effectively used for
the first time by Y.V. Reddy in 2005. Soon after, C. Rangarajan committee (2008) was
formed to study the form of financial exclusion and in order to identify the barriers that
Developing a financial inclusion index and inclusive growth in India 191

stop the vulnerable groups to access banking services, and recommended the steps to
achieve financial inclusion. In 11th five year plan (2007-12), government felt the need of
financial inclusion to boost economic growth. Further this growth generates rural
employment and can reduce poverty level of the country.

4. Need for Financial Inclusion

Access to affordable financial services would lead to increasing economic activities and
employment opportunities for rural households with a possible multiplier effect on the
economy. It could enable a higher disposable income in the hands of rural households
leading to greater savings and a wider deposit base for banks and other financial
institutions.
Financial inclusion will enable the Government to provide social development benefits
and subsidies directly to the beneficiary bank accounts, thereby drastically reducing
leakages and pilferages in social welfare schemes. It could be an instrument to provide
monetary fuel for economic growth and is critical for achieving inclusive growth.
There have been many selective objectives related to the need for financial Inclusion such
as:
I. Economic Objectives
By economic objectives, financial inclusion aims at achieving an equitable distribution of
income and reducing income saving gap.
II. Mobilisation of Savings
In the process of financial inclusion the weaker sections of the society can be linked to
the banking services which will create high level of national savings and later this saving
can be used for the investment and economic growth.
III. Larger Market for the Financial System
A larger market for the financial system can be created through the creation of high level
of savings and this market will meet the demand of the larger section of the society. This
process will create the growth of banking sector.
IV. Social Objectives
Through financial inclusion, social problems like poverty can be eradicated in the form of
giving bank loans to create income and livelihood.
V. Sustainable Livelihood
If the bank loans are given to weaker section of the society, than that will create their own
business and further, that can lead to sustainable livelihood of those weaker sections
192 Susanta Kumar Sethy

5. Need of the Study

Developing countries like India, it is necessary to include the entire section of the society
under a single roof of financial services. Still money lander in India dominants the rural
credit markets. The people in rural areas lacks knowledge about the entire range of
financial services such as: opening bank accounts and credit etc. Against the above
backdrop, the main purpose of this present study is to take in account the different
variables or indicators and construct a new Financial Inclusion Index. Through which we
can know that the banking services development in a country or a particular state.

6. Objective of the Study

In the light of these above problems an attempt has been made:
 To study the role of financial inclusion in inclusive growth.
 To identify the important indicators to construct a FII in India.
 To develop and propose an Index by which financial inclusion may be measured in
terms of direction, degree and intensity in the context of India.

7. Methodology
With the rising interest in financial inclusion across policymakers, a multiplicity of
financial inclusion indicators has been developed. As the inclusiveness of a financial
system should be evaluated along several dimensions, this study constructing a Financial
Inclusion Index (FII) is similar which previously used by United Nation Development
Programme (UNDP) for computation of some popular indices such as: Human
Development Index, Human Poverty Index and Gender Development Index and so on. To
construct an index, this study first calculating a dimension index for every dimension of
financial inclusion.
Formula 1:
∗
Where,
= Weight attached to the dimension i, 0 1;
= Actual value of dimension i;
= Minimum value of dimension i;
= Maximum value of dimension i;
= Dimensions of financial inclusion i.
Formula (1) confirms that 0 ≤ ≤ 1 and here, n dimensions of financial inclusion
represented by a point X = (1, 2, 3…). Point 0 = (0, 0, 0…0) represents the point
indicating the worst situation and Point W = (1, 2, 3 …) represents an ideal situation.
Here, both the worst point 0 and the ideal point W is the important factor to calculate an
index for countries’ and sates which indicates the position of financial inclusion. If the
distance will be larger between X and 0 then it represents higher financial inclusion and
Developing a financial inclusion index and inclusive growth in India 193

similarly if the distance will be lower between X and 0 then it represents lower financial
inclusion.
Formula 2:

……..

…….

Formula 3:
⋯

……….

Formula 4:
FII = ( + )

The formula (2), for financial inclusion index (FII), indicates average of the Euclidian
distance between X and 0. Higher value of implies more financial inclusion. Formula
(3), for FII, indicates inverse Euclidian distance between X and W and similarly,
higher value of corresponds to be higher financial inclusion. The formula (4) is the
simple average of and .
Depending on the value of FII, country will be categorised into
1. 0.6 FII 1 indicates high financial inclusion
2. 0.4 FII 0.6 indicates medium financial inclusion
3. 0 FII 0.4 indicates low financial inclusion
To calculate FII, this study taking into account two groups of indicators such as: demand
side indicators and supply side indicators of an inclusive financial system. Demand side
indicators such as: Banking Penetration (BP), Availability of Banking Services (BS) and
Usage of the Banking System (BU), Banking Linkage (BL). Supply Side indicators are:
Access to Savings, Access to Insurance, number of loans given to small entrepreneurs
(Banking Risk) and Banking Utilization (BU). Here, this study trying to develop two
separate index such as: Financial Inclusion Index with demand side indicators ( ) and
supply side indicators ( ). These indicators are examined elaborately as follows:
Demand side Indicators
(a) Banking Penetration: The number of people having a bank account is called banking
penetration. Thus, if every person in an economy has a bank account, then the value of
this measure would be 1.
 No. of deposit account with commercial bank per 1000 adults ( )
(b) Availability of banking services: The services of an inclusive financial system
should be easily to its users. Availability of services can be indicated by the number of
194 Susanta Kumar Sethy

bank outlets (per 100000 populations) and /or by the number of ATM per 100000
people, or the number of bank employees per customer. In the absence of comparable
data on the number of ATMs and number of bank staff, we can use the number of bank
branches per 100000 populations to measure the availability dimension.
 No. of ATM per 100000 adult ( )
 No. of commercial bank branches per 1000 adult ( )
(c) Usage of the banking system: Bank account is not enough for an inclusive financial
system, it is also imperative that the banking services are adequately utilized. Here,
outstanding deposit with commercial banks as percentage of GDP dimension used in this
present study.
 Outstanding deposit with commercial banks as percentage of GDP ( )
Supply side Indicators
(a) Access to Saving:
 Proportion of households having access to savings ( )
(b) Access to Insurance:
 Proportion of households having access to insurance ( )
(c) Bank Risk:
 No. of loans given to small entrepreneurs ( )

8. Data Sources and Variables

This study is primarily based on secondary data on the various variables such as Bank
branches, ATMs, Deposits, Credits, Small borrowable account (RBI), Female literacy,
Decadal population growth, Mobile users (Census of India), Insurance office, agents,
density and penetration, Micro Insurance (Insurance Regulatory and Development
Authority of India (IRDA)), SHGs (NABARD), Life expectancy (Census of India),
Number of NGOs (different working paper and websites), above all these are indicators
and dimension wise data sources and sourced from MOSPI, Economic Survey of India,
CSO, NSSO, IMF and World Bank.
For calculation of (taking demand side indicators), the study used different demand side
indicators such as: Banking Penetration, Availability of Banking Services and Usage of
the Banking System in India and the study period is spanning from 2004 to 2012. The
data on demand side indicators are sourced from Financial Access Survey (IMF) is the
data sources. For calculation of (taking supply side indicators), this study used different
supply side indicators such as: households having access to savings, households having
access to Insurance and number of loans given to small entrepreneurs through Schedule
commercial bank in India from 1975 to 2012 and all these supply side indicators variables
data are taken from RBI website. It is needless to mention here that the mismatched
Developing a financial inclusion index and inclusive growth in India 195

between the period of the study of demand and supply side indicators are due to lack of
availability of the data especially on demand side indicators.

9. Scope and Limitations of the Study

The study is limited to construct an Index of Financial Inclusion (IFI) in India. The study
is trying to explain the role of financial inclusion in inclusive growth. A major limitation
of this study is non-availability of data base of some important variables which can help
to get a robust result.

10. The Role of Financial Inclusion for Inclusive Growth in India

India needs inclusive growth in order to achieve rapid and well-organized growth.
Inclusive growth is necessary for sustainable development and equitable distribution of
wealth and prosperity. Achieving inclusive growth is important and also it is one of the
major challenges for India. The challenge is to take the levels of growth to all section of
the society and to all parts of the country. In order to address the problem of financial and
social exclusion in India, the 11th five year plan in India commissioned a strategy of
inclusive growth. The approach paper of the plan emphasised that “the 11th plan provides
an opportunity to reform policies to achieve a new vision of growth that will be much
broader based and inclusive, bringing about a faster reduction in poverty and helping
bridge the divides that are currently in focus”. More over economic growth to be
sustainable, it requires all sections of the society included and participating in the growth
process.
Financial inclusion is one of the systems through which Inclusive Growth can be
achieved in India where large sections are unable or hopeless to contribute in the
Financial System. An inclusive financial system mobilizes more resources for productive
purposes leading to higher economic growth, better opportunities and reduction of
poverty. Financial inclusion is unavoidable in creating economic opportunities to the
poor, supporting it, overcome the risk associated with it and continue to participate so that
they become successful economic mediators to the growth process of the country.
Keeping this in mind Government, RBI, banks and other financial institutions are making
policy interventions to accommodate the vulnerable in to the financial system. If we are
thinking about inclusive growth with stability, it is not possible without financial
inclusion and inclusive finance is a long run phenomenon which cannot be achieved
overnight, especially with regard to developing country like India where the access to
financial products is constrained by several factors such as lack of awareness,
unaffordability, high transaction costs etc.
196 Susanta Kumar Sethy

11. Empirical Result and Discussion

11.1. Computation of Financial Inclusion Index in India
Table 1. Index of Financial Inclusion-using data on 4 dimensions (demand side indicators) of financial
inclusion in India from 2004 to 2012
Year DACBA ATMA CBBA ODCBG
2004 610.98 0 2.5 0.02154 9.04 0.01739 46.61 0
2005 611 0.00004 2.31 0 9.02 0.00869 47.3 0.04911
2006 622.19 0.02643 2.76 0.05102 9 0 48.69 0.14804
2007 652.85 0.09875 3.41 0.12471 9.11 0.04782 52.08 0.38932
2008 717.35 0.25088 4.33 0.22902 9.43 0.18695 57.72 0.79074
2009 801.47 0.44929 5.36 0.34580 9.73 0.31739 60.54 0.99145
2010 872.91 0.61778 7.34 0.57029 10.18 0.51304 58.51 0.84697
2011 944.97 0.78774 8.95 0.75283 10.65 0.71739 60.05 0.95658
2012 1034.96 1 11.13 1 11.3 1 60.66 1
Source: Authors’ computation

Calculation based on Financial Access Survey (IMF), 2004-2012.

Note, DACBA = No. of deposit account with commercial bank per 1,000 adults
ATMA = No. of ATMs per 100000 adults
CBBA = No. of commercial bank branches per 1,000 adults
ODCBG = Outstanding deposit with commercial banks as percentage of GDP
= Dimensions
Table 2. Index for Financial Inclusion on demand side indicators of Financial Services ( ) in India
Year Value of Value of
2004 0.013842986 0.009684393 0.011764
2005 0.024937122 0.014253944 0.019596
2006 0.079402132 0.054720582 0.067061
2007 0.211640669 0.154730101 0.183185
2008 0.440349159 0.318017049 0.379183
2009 0.592699541 0.452898517 0.522799
2010 0.649515065 0.615527822 0.632521
2011 0.808858982 0.783266428 0.796063
2012 1 1 1
Source: Authors’ Computation

As per the method mentioned above, Financial Inclusion Index (FII) for the year 2004 to
2012 aggregated data (including all states) in India is calculated. The country is grouped
into three categories namely, higher, medium and low financial inclusion (Table 3) based
on range of Index. If the country’s Index score will be varies from 0.6 to 1 then it is called
high financial inclusion. If the country’s Index score will be varies from 0.4 to 0.6, then it
categorised the under the medium financial inclusion. Similarly, 0 to 0.4 categorised
under the low financial inclusion.
Developing a financial inclusion index and inclusive growth in India 197

Table 3. Classification of India according as the value of FII from Demand side
Year FII Range Category
2004 0.011
2005 0.019
2006 0.067 0 FII 0.4 Low FI
2007 0.183
2008 0.379
2009 0.522 0.4 FII 0.6 Medium FI
2010 0.632
2011 0.796 0.6 FII 1 High FI
2012 1
Source: Authors’ Computation
Note, FI means Financial Inclusion and FII means Financial Inclusion Index

Above Table 3 depicts that, the classification of India as the value of Financial Inclusion
Index from demand side. It is an absolute measure of financial inclusion. From 2004 to
2008, values of Financial Inclusion Index vary from 0 to 0.4. It indicates that, during this
period India is categorised under the low financial inclusion. There may be various
reasons behind the achievement of low financial inclusion but the major reasons may be
the lack of initiatives taken by the GOI and RBI, unawareness about the banking policies
and financial crisis (2007-08) etc. In 2009, India is categorised under the medium
financial inclusion. During 2010 to 2012, India is categorised under the full financial
inclusion or high financial inclusion.
Table 4. Classification of India according as the value of FII from Supply side
Year FII Range Category
1975 0.43
1976 0.46
1977 0.42
1978 0.46
1979 0.47
1980 0.44
1981 0.58
1982 0.48 0.04 FII 0.06 Medium FI
1983 0.45
1984 0.47
1985 0.47
1986 0.46
2010 0.43
1011 0.41
2012 0.51
1987 0.35
1988 0.35
1989 0.32
1990 0.29
1991 0.31
1992 0.33
1993 0.34
1994 0.39
198 Susanta Kumar Sethy

Year FII Range Category

1995 0.33
1996 0.34
1997 0.28
1998 0.23 0 FII 0.4 Low FI
1999 0.21
2000 0.16
2001 0.14
2002 0.14
2003 0.22
2004 0.25
2005 0.28
2006 0.32
2007 0.37
2008 0.27
2009 0.3
Note: FI means Financial Inclusion and FII means Financial Inclusion Index.
Source: Authors’ computation.

Table 4 explains that, the classification of India as the value of Financial Inclusion Index
from supply side. From 1975 -1980, 1981-86 and 2010-2012 India categorised under the
medium financial inclusion (0.4 to 0.6). During 1987-1988 and 1989-2009, India is
categorised under the low financial inclusion (0 to 0.4). There are also many reasons
behind the low financial inclusion in India, in case of supply side financial services such
as narrowing of the branch network in rural areas, fall in credit deposit ratios in rural
areas, high transaction cost, staff attitude and complex products etc. Here, the major
difference between the demand side indicators of FII and supply side indicators of FII
during the period 2010 to 2012 is that India is categorised under the high financial
inclusion in case of demand side indicators but low financial inclusion in case of supply
side indicators.
Hence, the GOI and RBI should take into account the major challenges to improve the
arena of financial inclusion by providing the supply side financial services and also
demand side financial services in India. By the achievement of full or high financial
inclusion, it will be more help full to reduce the farmers indebtedness, promoting
inclusive growth, improves the standard of living and promote grassroots innovations and
entrepreneurship etc.
11.2. Association between Demand for and Supply of Financial Inclusion in India
In order to make a comparative analysis between the demand for financial services and
the supply of financial services in India, it requires data on demand- supply components
at the same point of time. Since study is based on the data from 2004 to 2012.
The movement of both the demand and supply side indices of financial inclusion is
shown in the following Table 5 and Figure 1. An association between these two indices is
quite evident in the Figure 1.
Developing a financial inclusion index and inclusive growth in India 199

Table 5. Movement of FII of Demand for and Supply of Financial Services

Year FII of Demand for Financial Services FII of Supply of Financial Services
2004 0.011764 0.250309
2005 0.019596 0.289445
2006 0.067061 0.323024
2007 0.183185 0.371664
2008 0.379183 0.274519
2009 0.522799 0.3032
2010 0.632521 0.433127
2011 0.796063 0.416594
2012 1 0.511182
Source: Authors’ computation.

Figure 1 simply plots the relationship between the process of financial inclusion from
demand side and supply side perspectives in India. This figure shows that, the trend line
of financial inclusion index of demand for banking services is going upward with very
minimal fluctuation but at the same period, the trend line of financial inclusion index of
supply of banking services is going upward with more fluctuation. From this observation,
finally, we can conclude that, both financial inclusion index of demand for banking
services and supply of banking services are increasing year by year. It is only possible
through different initiatives taken by the GOI and RBI and our policy maker also should
alert about recent causes of financial exclusion in India. In spite of that, right now it
indicates that the India is walking on the right path and going to achieve full financial
inclusion in near future.
Figure 1. Movement of FII of Demand for and Supply of Financial Services

1.2

0.8
FII of Demand for Financial
0.6 Services
FII of Supply of Financial
0.4 Services

0.2

0
2002 2004 2006 2008 2010 2012 2014

Source: Authors’ computation.

200 Susanta Kumar Sethy

Table 6. Index of Financial Inclusion for the States of India

State (Penetration) IFI IFI PNSDP at current
(Availability) (Usage) Rank price
Chandigarh 0.002 0.638 0.455 0.311 2 128634
Delhi 0.136 1.000 0.294 0.356 1 150653
Haryana 0.192 0.094 0.142 0.142 23 94680
Himachal Pradesh 0.118 0.085 0.153 0.118 27 65535
Jammu &Kashmir 0.222 0.137 0.108 0.105 28 37496
Punjab 0.111 0.156 0.201 0.156 28 69737
Rajasthan 0.341 0.080 0.067 0.153 21 42437
Arunachal Pradesh 0.424 0.113 0.050 0.179 13 55789
Assam 0.494 0.042 0.055 0.170 16 30569
Manipur 1.000 0.005 0.002 0.186 12 29684
Meghalaya 0.315 0.074 0.062 0.142 23 50427
Mizoram 0.244 0.056 0.018 0.101 29 48591
Nagaland 0.599 0.017 0.000 0.158 18 52643
Tripura 0.537 0.028 0.069 0.178 14 44965
Andaman & Nicobar 0.230 0.055 0.186 0.154 20 76883
Bihar 0.746 0.092 0.047 0.226 5 20708
Orissa 0.304 0.087 0.054 0.141 25 40412
Sikkim 0.147 0.178 0.076 0.132 26 81159
West Bengal 0.378 0.120 0.94 0.187 11 48536
Madhya Pradesh 0.568 0.095 0.051 0.203 6 32222
Uttar Pradesh 0.503 0.092 0.086 0.203 6 26355
Goa 0.019 0.202 1.001 0.270 4 168572
Gujarat 0.246 0.098 0.098 0.145 22 75115
Maharashtra 0.275 0.485 0.127 0.281 3 83471
Andhra Pradesh 0.257 0.143 0.140 0.178 14 62912
Karnataka 0.172 0.262 0.168 0.200 8 60946
Kerala 0.127 0.154 0.198 0.159 17 71434
Puducherry 0.239 0.112 0.242 0.195 10 98719
Tamil Nadu 0.213 0.214 0.147 0.200 8 72993
Source: Authors Calculation (Data Sources: RBI).

It explains Index of Financial Inclusion for the state of India and this Index indicates how
much a state is sound in providing financially services. Here, Delhi has scored 1 rank
because its value of Index of Financial Inclusion (IFI) is 0.356 which is the highest value
among other states of India. Similarly, Mizoram has scored 29th rank which is the lowest
rank among other states of India because its value of Index of Financial Inclusion (IFI) is
0.101. From this rank we can know that, Delhi has better financial services such as
penetration, availability and usage and people were more included with banking and
financial services comparison to other states of India (Table 6).
Developing a financial inclusion index and inclusive growth in India 201

12. Cross Country Comparison

Table 7. Financial Inclusion indicators in SAARC Countries
Outreach India Bangladesh Pakistan Nepal Sri Lanka Afghanistan
of Financial
Services
Bank branch per 10.11 5.16 8.68 4.19 9.05 2.00
100000
population
Bank 26.46 43.14 11.73 5.26 21.38 0.49
branches
per 1000
KMs
Deposits 467.40 228.75 119.84 229.49 1891.74 83.85
accounts
per 1000 adults
Loans 137.0 54.73 21.93 1.81 12.29 3.32
account per
1000 adults
ATM per 7.29 - 4.06 1.81 12.29 -
100000
population
ATM per 19.08 - 5.49 2.27 29.03 0.39
1000 Km
Financial 49 35 55 - - -
Access
Index Rank
(WEF 57
Countries)
Sources:
1. Compiled from Financial Access 2010, www.cgap.org
2. W.E.F (World Economic Forum), 2010, www.weforum.org

Table 7 depicts that there is extensive dissimilarity among countries in the South Asian
region in terms of deposit account penetration and access to credit. The deposit account
per 1000 population varies from 83 bank accounts in Afghanistan to 1891 bank accounts
in Sri Lanka. Similarly, in terms of loan account penetration, it differs from only 3 bank
loans per 1000 adults in Afghanistan to 137bank loans per 1000 adults in India. The
ATMs location per 100000 populations equally varies from Nepal to 12.29 in Sri Lanka.
India’s rank in Financial Access Index is 49 among all the countries of the World.

13. Conclusion
If we consider financial inclusion as a coin then, both demand side as well as and supply
side indicators of banking services are the two side of a same coin. As one side of a coin
cannot represent the coin fully similarly in case for the success of financial inclusion, a
demand side or a supply side indicator cannot influence individually significantly. Hence,
to achieve a high and sustainable financial inclusion in India both demand side as well as
supply side indicator are indispensable.
202 Susanta Kumar Sethy

The FII can be used to compare the extent of financial inclusion across different
economies and to monitor the progress of the economies with respect to financial
inclusion over time. From the computation, it is evident that during 2010 to 2012
(Demand side Indicators), India is categorised under the full financial inclusion or high
financial inclusion since the value of FII is ranged from 0.6 to1. During 1987-1988 and
1989-2009(Supply side indicators), India is categorised under the low financial inclusion
(0 to 0.4). There are also many reasons behind the low financial inclusion in India, in case
of supply side financial services such as narrowing of the branch network in rural areas,
fall in credit deposit ratios in rural areas, high transaction cost, staff attitude and complex
products etc. Here, the major difference between the demand and supply side indicators
of FII during the period 2010 to 2012 is that India is categorised under the high financial
inclusion in case of demand side indicators but low financial inclusion in case of supply
side indicators. Hence, the GOI and RBI should take into account the major challenges to
improve the status of financial inclusion by addressing the adequate policies to improve
the supply side financial services and also demand side financial services in India. By the
achievement of full or high financial inclusion, it will easy to reduce the farmer’s
indebtedness, promoting inclusive growth, improves the standard of living and promote
grassroots innovations and entrepreneurship etc.

14. Contribution of this Study

In the previous studies, indices were computed using select indicators of banking only
(such as Banking penetration, Availability of banking services and Usage of banking
system) whereas this study considers other potential banking services such as Baking
Risk, Access to savings and Access to Insurance (supply side indicators). This study takes
into consideration supply and demand side indicators of financial services and it also
developed two separate types of Financial Inclusion Index (FII) such as : Financial
Inclusion Index with demand side indicators ( ) and Financial Inclusion Index with
supply side indicators ( ).

15. Scope for Future Research

The construction of FII by considering the demand side and supply side indicators in the
context of India at aggregate level is constructed here in this study. However, the study
couldn’t consider a lot of potential indicators to represent the demand side indicators
because of the lack of the availability of the data. Secondly, the lack of the data
availability is also limited the study while comparing the FII at both demand side and
supply side. However, keeping this in mind, whatever this study attempted over can be
seen as the initial investigation in this direction. The further research may be investigated
to construct the FII at state and region level by considering disaggregated data. From the
policy prospective point of view we can see the impact of FII on poverty, inequality,
employment etc.
Developing a financial inclusion index and inclusive growth in India 203

Note
(1)
See also, M. Stolbov, 2013, The Finance-Growth Nexus Revisited: From Origins to a Modern
Theoretical Landscape. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 7, p. 2.

References

Adhikay, M. and S. Bagli, 2010. Impact of SHGs on Financial Inclusion- A case study in the
District of Bankura, Journal of Management and Information Technology, 2(1).
Aduda, J. and Kalunda, J., 2012. Financial Inclusion and Financial Sector Stability with Reference to
Keynea: A Review of Literature, Journal of Applied Finance and Banking, 2(6), pp. 95-120.
Aggarwal, R., 2014. Financial Inclusion in India: Challenges and Opportunities, International
Journal of Research, 1(4).
Ambarkhane, D. et al. 2014. Measuring Financial Inclusion of Indian States, Social Science
Research Network.
Amidžic, G. et al. 2014. Assessing Countries Financial Inclusion Standing – A New Composite
Index, IMF Working Paper.
Anath, S. and Sabrioncu, T., 2013. Challenges to Financial Inclusion in India: The case of AP,
EPW, Vol. xlvii (7).
Andrianaivo, M. and Kpodar, K., 2011. ICT, Financial Inclusion and Growth: Evidence from
African Countries, IMF Working Paper.
Ardic, O.P., 2011. Access to Financial Services and the Financial Inclusion Agenda around the
World: A Cross-Country Analysis with a New Data Set, Policy Research Working Paper,
p. 5537.
Atkinson, A. et al., 2006. Financial Capability in the United Kingdom: Results of a Baseline
Survey, Financial Services Authority.
Bagli, S. and Papita, D., 2012. A Study of Financial Inclusion in India, Radix International
Journal of Economics and Business Management, 1(8).
Bajrang and Vipin, K., 2013. Financial Inclusion through SHGs: A case Study of Narnaul Block in
Haryana, International Journal of Enhanced Research in Management and Computer
Applications, 2(6), pp. 15-20.
Beck, T. and Torre A.D.L., 2006. The basic analytics of access to financial services, Policy
Research Working Paper 4026, Washington: World Bank.
Beck, T. Demirguc-Kunt and Peria, M., 2007. Reaching out: Access to and use of banking services
across countries, Journal of Financial Economics, Vol. 85, pp. 234-266.
Bhatia, S. and Singh, S., 2015. Financial inclusion – A path to sustainable growth, International
Journal of Science Technology & Management, 4(1).
Burkett, I. and Sheehan, G., 2009. From the margins to the mainstream, Brotherhood of St.
Laurence.
Cesar, M.Z.P., 2013. Financial Inclusion Index: Proposal of a Multidimensional Measure for
Mexico, Revista Mexicana de Econom´ıa y Finanzas, 8(2), pp. 157-180
Camara, N. and David, T., 2014. Measuring Financial Inclusion: A Multidimensional Index, BBVA
Working Paper.
Camara, N. et al., 2014. Factors that Matter for Financial Inclusion: Evidence from Peru, BBVA
Working Paper.
Chakraborty, K.C., 2009. Financial Inclusion, RBI Initiatives at National Seminar on launching a
National initiative for financial inclusion, DFS Government of India.
204 Susanta Kumar Sethy

Chandan, K., 2013. Financial Inclusion and Development: Issues and Concerns, International
Journal of Management and Development Studies, 2(5).
Chandran, J., 2010. Challenges for India in Moving towards Financial Inclusion, Journal of
Contemporary Research in Management, 5(2).
Charkravarty, S.R. and Pal, R., 2010. Measuring financial inclusion: An Axiomatic Approach,
IGIDR, Working Paper.
Chattopadhyay, S.K., 2011. Financial Inclusion in India: A case Study of West Bengal, RBI
Working Paper.
Chibba, M., 2009. Financial Inclusion, Poverty Reduction and the millennium Development
Goals, European Journal of Development Research, Vol. 21, pp. 213-230.
Goldsmith, R.W., 1975, Financial Structure and Development, Vol. 1, New Haven, CT Yale
University Press, p. 969.
Gupte, R. et al., 2012. Computation of financial inclusion index for India, Procedia: Social and
Behavioral Sciences, ICEE
Kunt, A.D. and Klapper, L., 2013. Measuring Financial Inclusion: Explaining Variation in use of
Financial Services across and within Countries, Brooking Paper on Economic Activity,
pp. 279-321.
Leyshon, A. and Thrift, N., 1995. Geographies of financial exclusion: financial abandonment in
Britain and the United States, Transaction of the Institute of British Geographer, New
Series, pp. 312-341.
Mahendra, D.S., 2006. Financial Inclusion: Issues and Challenges, Economic and Political
Weekly, Vol. 41, pp. 4310-4313.
Massara, G.A.A. and Mialou, A., 2014. Assessing Countries Financial Inclusion Standing – A
New Composite Index, IMF Working Paper.
Mbutor, O.M. and Uba, I.A., 2013. The Impact of Financial Inclusion on Monetary Policy in
Nigeria, Journal of Economics and International Finance, 5(8), pp. 318-326.
Mehrotra, N. et al., 2009. Financial Inclusion: An overview National Bank for Agriculture and
Rural Development, Dept of Economics Analysis & Research: Occasional Paper – 48,
Mumbai.
Mir, S.Q. et al., 2014. A Study on the effectiveness of the Financial Inclusion Programme in
Jammu and Kashmir: Initiatives by the major Banks, Global Journal of Finance and
Management, 6(3), pp. 281-286.
Mohan, R., 2006. Economic growth, financial deepening and Financial Inclusion, Address at the
Annual Bankers Conference.
Mohan, T.T.R., 2014. More on Financial Inclusion: A few baby steps, not a great leap forward,
EPW, 42(16).
Mohapatra, S. and Kamilla, U., 2013. Economic Measurement and Analysis of Financial Inclusion
in Odisha, Asian Journal of Research in Business Economics Management (AJRBEM),
3(9), pp. 177-190.
Piñeyro, C.M.Z., 2013. Financial inclusion index: Proposal of Multidimensional Measure for
Mexico, The Mexican Journal of Economics and Finance, available at: http://www.remef.
org.mx/c/images/uploads/documentos/31/8_2_zulaica.pdf.
Yorulmaz, R., 2013. Construction a regional financial inclusion index in Turkey, available at:
http://www.bddk.org.tr/websitesi/turkce/raporlar/bddk.../12252makale4.pdf.
Developing a financial inclusion index and inclusive growth in India 205

Appendix
Index of Financial Inclusion-using data on 3 dimensions (supply side indicators) of financial inclusion
in India from 1975 to 2012
Year PHHS PHLIF SE
1975 153.8917 0.564285 1197.872 0.721355 11.53 0
1976 156.8981 0.600736 1269.275 0.784405 14.03 0.000364
1977 148.7316 0.50172 1208.446 0.730691 17.04 0.000803
1978 146.2808 0.472005 1388.433 0.889624 22.32 0.001573
1979 153.4337 0.558731 1325.873 0.834382 26.95 0.002248
1980 146.7763 0.478013 1324.372 0.833056 39.53 0.004081
1981 189.828 1 1313.5 0.823457 44.64 0.004826
1982 159.0934 0.627353 1303.401 0.814538 53.89 0.006174
1983 145.5723 0.463414 1365.552 0.869419 65.37 0.007848
1984 139.6085 0.391105 1513.432 1 78.29 0.009731
1985 145.7045 0.465017 1436.875 0.932398 91.27 0.011623
1986 139.3769 0.388297 1475.174 0.966217 106.59 0.013856
1987 109.5136 0.026214 1394.593 0.895062 129.68 0.017222
1988 130.4624 0.280212 1167.339 0.694393 146.35 0.019651
1989 128.6136 0.257796 1092.48 0.628291 159.69 0.021596
1990 123.7609 0.198958 1052.116 0.59265 179.38 0.024466
1991 135.8774 0.345867 971.655 0.521601 189.39 0.025925
1992 128.6675 0.258449 1129.519 0.660998 209.75 0.028893
1993 127.4275 0.243414 1148.073 0.677381 239.78 0.03327
1994 131.8079 0.296526 1279.692 0.793603 291.75 0.040845
1995 145.9571 0.46808 894.8971 0.453822 342.46 0.048237
1996 141.7239 0.416754 983.3075 0.53189 381.96 0.053994
1997 133.6691 0.319092 884.8016 0.444907 457.71 0.065036
1998 118.7567 0.138284 883.9978 0.444197 516.79 0.073647
1999 117.7725 0.126352 824.6509 0.391793 570.35 0.081454
2000 111.1687 0.046283 730.8556 0.30897 601.41 0.085981
2001 107.3515 3.39E-07 693.6344 0.276103 671.07 0.096135
2002 116.3195 0.108733 621.7616 0.212638 647.07 0.092637
2003 125.2724 0.217285 745.5456 0.321942 712.09 0.102114
2004 137.5833 0.36655 657.731 0.2444 834.98 0.120027
2005 142.1367 0.421759 699.6814 0.281443 1012.85 0.145953
2006 149.4283 0.510167 665.7939 0.251519 1273.23 0.183907
2007 164.2006 0.689276 454.7507 0.065164 2135.39 0.309576
2008 135.4464 0.340642 475.5229 0.083506 2561.28 0.371654
2009 133.8202 0.320924 380.9538 9.28E-09 3622.91 0.526398
2010 145.6383 0.464214 513.9727 0.117458 4785.27 0.695825
2011 137.4609 0.365066 470.5357 0.079103 5276.84 0.767476
2012 137.5635 0.36631 578.846 0.174743 6872.08 1
Source: Authors’ computation.
Here, PHHS = Proportion of households having access to savings
PHLIF = Proportion of households having life insurance fund
SE = No. of loans given to small entrepreneurs (Banking Risk)
= Dimensions
 206 Susanta Kumar Sethy

Index for Financial Inclusion on Supply side indicators of Financial Services ( ) in India
Year Value of Value of
1975 0.528762676 0.350002307 0.439382
1976 0.57043087 0.366184936 0.468308
1977 0.511740132 0.336875041 0.424308
1978 0.581441141 0.344810727 0.463126
1979 0.579764084 0.362908416 0.471336
1980 0.554525418 0.343698525 0.449112
1981 0.747909178 0.416465206 0.582187
1982 0.593600016 0.377919905 0.48576
1983 0.568830398 0.344423391 0.456627
1984 0.619961762 0.32883545 0.474399
1985 0.601593045 0.349957431 0.475775
1986 0.601260414 0.329726012 0.465493
1987 0.51708173 0.198933196 0.358007
1988 0.432468258 0.275989466 0.354229
1989 0.392290401 0.259210184 0.32575
1990 0.361209211 0.234217292 0.297713
1991 0.361645804 0.268431294 0.315039
1992 0.410101006 0.267909369 0.339005
1993 0.41601376 0.267180819 0.341597
1994 0.48969451 0.302993716 0.396344
1995 0.377438482 0.295939514 0.336689
1996 0.391367699 0.303764874 0.347566
1997 0.31832474 0.259297207 0.288811
1998 0.271942323 0.202169636 0.237056
1999 0.242281737 0.188231647 0.215257
2000 0.187080498 0.139277599 0.163179
2001 0.168794549 0.116635608 0.142715
2002 0.147895736 0.136363714 0.14213
2003 0.231866623 0.208670942 0.220269
2004 0.263626513 0.236992106 0.250309
2005 0.304627126 0.274262903 0.289445
2006 0.345134777 0.30091294 0.323024
2007 0.437867811 0.305460989 0.371664
2008 0.295034829 0.254003358 0.274519
2009 0.355943329 0.25045718 0.3032
2010 0.487669003 0.378585205 0.433127
2011 0.492798219 0.340388811 0.416594
2012 0.623088612 0.399274804 0.511182
Source: Authors’ computation.

View publication stats