Financial inclusion across major Indian states: some spatial panel econometric evidence

Purpose - This paper aims to test for spatial convergence in financial inclusion across major Indian states and union territories. Design/methodology/approach - After initially building an Index of Financial Inclusion (IFI) for major Indian states between 2003 and 2016, exploratory spatial data analysis (ESDA) is employed to draw inferences about mean and variance of IFI. The paper then seeks to confirm the ESDA results through spatial panel regression techniques. Finally, spatial results are correlated with results from aspatial convergence measures. Findings - The study finds that there is no evidence of spatial convergence in financial inclusion over the study period, suggesting that those states that were relatively less financially included remained so through the study period. The study also asserts the relevance of certain important determinants, namely, per capita income, infrastructure, industrialization and gender. Research limitations/implications - This study has two limitations. First, only banking institutions are considered in measuring financial inclusion. Second, due to lack of a consistent indicator of gender participation across states, we had to employ sex ratio as a proxy. Practical implications - The study suggests that policies to expand financial inclusion in Indian states, especially those with low inclusion levels are likely to benefit neighbouring states also, thereby accelerating the financial inclusion drive across states. Originality/value - The study is a first in the Indian context to estimate the spatial dependence of financial inclusion and provides relevant implications for policymakers and bankers to target financial inclusion schemes in backward states.