Operationalising Financial Inclusion Index as a Policy Lever: Uttar Pradesh (in India)-A Case Study

Abstract

The inter relationship between financial development and economic growth is well accepted. In the recent years, the debate has expanded to include the notion of financial “exclusion” as a barrier to economic development and the need to build an inclusive financial system (Beck et al. 2008). Recent empirical evidence using household data indicates that access to basic financial services such as savings, payments, insurance and credit can make a substantial positive difference in improving poor people’s lives (Caskey et al. 2006, Dupas and Robinson 2009). India with its diversities in extent of development across provinces and within them across regions badly needs a ‘multi-variate index’ to reflect extent of financial penetration so that policy measures can be effectively organized in sync with requirements. This paper aims at using a Financial Inclusion Index (FII) to rank considered 71 districts of Uttar Pradesh (in India) in terms of level of financial penetration. Based on the secondary data on some of the available factors, suitable FII has been enumeratedforthe districts. The main objective of the study is to provide a statistically justified method for assignment of appropriate weights to the factors according to their importance and devise a method to obtain individual factor indices. Instead of one, four methods are discussed and compared extensively. The proposed index lies between 0 to ∞, where 0 represents complete financial exclusion. This ranking will help policy makers choose appropriate levers to mitigate the complex problem of financial penetration-deficit.

Keywords: Financial Inclusion, Financial Development, GDP, Principal Component Analysis (PCA)