Association between

Financial Inclusion-Poverty Reduction across the Indian States

Bhagaban Das1

------------------------------------------India has grown strongly since the economic reforms of the early 1990s, with growth averaging
around 7 percent during 1993-2010. After growing at an average rate of 6 percent during 19932004, growth accelerated to 8 percent during 2004-10. High rates of economic growth have been
more broadly shared than ever before across the Indian states during this latter periodmany poor
states grew at double-digit rates. This rapid economic growth has contributed to a substantial
reduction in poverty. The poverty headcount rate, measured using the national poverty line, declined
by 1.5 percentage points per year in 2004-10, double the rate of the preceding decade. More recent
data suggests that between 2004/05 to 2011/12, poverty declined by 2.2 percentage points per year,
which is about three times the pace of the poverty reduction of the preceding decade. Yet India
continues to have the largest number of poor (approximately 300 million) in the world, and nearly
half of the poor are concentrated in five states.
Again India is home to the second largest population (1.22 billion, census 2011) and largest
unbanked population in the world (40% unbanked population). V. Leeladhar, defines Financial
Inclusion as delivery of banking services at an affordable cost to the vast sections of disadvantaged
and low income groups. As per Census 2011, 58.7% households are availing banking services in the
country. However, since 2001, the spread has increased but the growth rate is low and not remarkable
considering the different initiatives taken by government, RBI and private NGOs. There are 102,343
branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37 percent bank
branches are in the rural areas and 26 percent in semi-urban areas, constituting 63 per cent of the total
numbers of branches in semi-urban and rural areas of the country. However, a significant proportion
of the households, especially in rural areas, are still outside the formal fold of the banking system
which one of the main cause of financial exclusion.
Financial inclusion is often considered as a critical element that makes growth inclusive as access to
finance can enable economic agents to make longer-term consumption and investment decisions,
participate in productive activities, and cope with unexpected short-term shocks. Understanding the
link between financial inclusion, poverty, and income inequality at the country level will help
policymakers design and implement programs that will broaden access to financial services, leading
to reduction of poverty incidence and income equality. Therefore, financial inclusion has emerged as
an important topic on the global agenda for sustainable long-term economic growth.
Under the above backdrop, this paper attempted to find the relationship between poverty reduction
and financial inclusion through bank reaches across the different states of India and concluded that
financial inclusion is not significantly associated with the reduction in below poverty line population
across states in India.
1 Professor, Head and Dean of Commerce and Management, Fakir Mohan University, Balasore, Odisha756019