The Role of Financial Inclusion and Development in Sustainable Economic Growth - Evidence from India

Abstract

Financial inclusion and development are crucial to measure sustainable economic growth. This research shed light on the role of financial inclusion and development in fostering sustainable economic growth. The study is based on publicly available open-source data on the Indian economy from 1980 to 2021. The study uses economic growth (EG) dependent variables, financial inclusion (FI), and financial development (FD) as independent variables, and trade openness (TOP) and foreign direct investment (FDI) as control variables. Initially, this study notices that the selected multivariate time series is nonstationary at the first difference and exhibits cointegration, secondly, it uses the VECM to establish a long-run model, and finally, it concludes with the causal relationship between FI, FD, and EG. Firstly, the study reveals a one-way causal relationship between i) FI and EG, ii) EG and FD, iii) FDI and FI, iv) TOP and EG, and v) FDI and TOP, and the two-way causal association between FD and FI. However, there is no causal relationship between FD and EG. Secondly, it confirms that economic growth results from financial inclusion with significant beta and financial development with insignificant beta. Therefore, financial services are affordable to every person in society, especially the underprivileged and poor, they must be easily available to access and use, ultimately leading to economic growth.