Financial inclusion provides swift and economical financial services to the remotest population and helps in generating funds. However, researchers conclude that economic events often obstruct the expansion of financial services. Keeping in view the importance of financial inclusion, the present chapter attempts to investigate how economic uncertainty influences financial inclusion initiatives of the Central Bank of India. Moreover, the chapter also investigates the moderating role of governance on the interconnection of financial inclusion and economic uncertainty. To this end, advanced econometric methodologies are employed to conduct an exhaustive empirical analysis on the dataset from 2000-2021. The empirical outcome infers that high economic uncertainty impedes the financial inclusion. However, when the indicators of governance interact with economic uncertainty, it moderates the negative influence of economic policy uncertainty on financial inclusion. The finding assists in understanding the interrelation of financial inclusion, economic uncertainty, and governance.
Top1. Introduction
India is one of the fastest-emerging countries in the world, with a population of 1.4 billion individuals. This vast population is scattered in several states, union territories, villages, and districts. Indian population is a blessing for economic progress as it provides cheap labour and creates a favourable scope for entrepreneurial activities, hence, considered a population dividend (Shaban, 2022). In addition to the population dividend, India also has a well-resourced and developed infrastructure which provides a breeding ground for industrial development. Since the past decade Indian industries, for instance, the hospitality industry, banking industry, automobile industry, service industry, etc. have contributed significantly both globally and at the domestic level. The enormous population dividend, market potential, and a network of well-structured industries make India the preferred nation for global economic growth and development. However, despite the numerous opportunities, emerging countries like India often face several challenges during the transition from an emerging to a developed country.
One of the most prominent challenges for an emerging country with such a demographic and geographical versatility is the availability of financial services to the remotest location of the country. The availability of financial services to the furthest population at an affordable cost is described as financial inclusion (Ozili, 2021). In addition to providing financial services to every individual, financial inclusion also assists in creating a robust financial base at a reasonable cost. Considering the myriad benefits of financial inclusion, government and the central banks of different countries took drastic measures to increase financial inclusion. For instance, expansion of bank branches, increase in the ATM machines and fintech solutions toward financial inclusion, etc (Demirgüç-Kunt and Singer, 2017). Over the last decade, the Indian government and the Reserve Bank of India have also taken several initiatives to increase financial inclusion. For example, they resorted to the National mission for financial inclusion, i.e. Prime Minister Jan Dhan Yojana (PMJDY), they tried to implement AI and fintech services in increasing access to financial services (Pandey and Kiran, 2022). Fintech services increase the accessibility of financial services through various modes like mobile, internet, etc. These steps aligned with the multilateral goals of the G20 and the World Bank (Timermann and Gmehling, 2017). The Indian banking industry has a widespread network of public, private, and foreign banks, and the Reserve Bank of India (RBI), which is the central bank of India, supervises and regulates the fragmented Indian banking structure. The Reserve Bank of India not only assists in drafting policies toward financial inclusion but also supervises it to avert fraud and scams caused due to the excessive use of financial services. Recently, the Indian Government and the Reserve Bank of India came together with the National Strategy for Financial Inclusion (2019-2024). The vision of this national plan is to promote stable financial inclusion in an affordable manner and promote financial literacy and consumer protection. In addition to the National Plan, the Reserve Bank of India also took several other initiatives like easing out the rules for setting up bank branches in rural areas, advisory to banks to prepare a three-year financial inclusion plan, relaxation in bank authorization guidelines, setting up of a financial inclusion fund, differential banking license, formation of financial literacy centers, etc (Sriram, 2017). To an extent, these cumulative steps assist in increasing financial inclusion in India. According to the RBI report, in 2022, the financial inclusion index (FII) increased from 53.9 (2021) to 56.4 in 2022. The increase in FII denotes a huge spur in banking penetration, banking touchpoints, and digitalization. Although the number of branches has not increased considerably, yet there is a substantial increase in point-of-sale terminals, accounts opened in the Pradhan Mantri Jan Dhan Yojana (from 63.84 crores in March 2021 to 66.31 crores in March 2022), and deposits made in these accounts (from Rs. 1,99,503 crores in March 2021 to Rs. 2,13,646 crores in March 2022).