What Role Does Financial Inclusion Play for Poverty Reduction? Empirical Evidence From The Indian States in the Post-Liberalization Era

Abstract

The paper tries to analyzes the effect of financial inclusion on poverty reduction among 28 Indian states and rural-urban as well. Using data from 28 Indian states over the period of 1993 to 2015, this study constructed a single financial inclusion index through Principal Component Analysis (PCA) method, which signifies the state-wise variation in financial inclusion services. Furthermore, this study uses Fixed Effect, Random Effect, Panel Corrected Standard Errors, Feasible General Least Square, and Hausman-Taylor Regression model to know the impact of financial inclusion on state-wise poverty reduction and rural-urban poverty reduction as well. The results of this study suggest that financial inclusion has a negative and significant effect on state-wise and rural-urban poverty reduction respectively. With regards to the control variables, this study finds that variables like social sector expenditure, per capita state GDP and capital receipt are negatively associated with all three categories of poverty (i.e., overall poverty and rural-urban poverty) whereas the rural population is positively associated.