The Effects of Financial Inclusion on Economic Development: An Empirical Case Study of India’s Jan Dhan Yojana Banking Scheme

Abstract

Studying financial inclusion policies in developing countries is important due to the large share of unbanked people who cannot save money securely and achieve economic mobility. The Pradhan Mantri Jan Dhan Yojana (JDY) is a financialization program implemented by Prime Minister Narendra Modi in 2014 to expand access to bank accounts and RuPay debit cards in India. This thesis explores how the provision of financial tools through the JDY affected economic growth at the state level in India by exploiting variations in implementation. I first motivate why financial inclusion research should focus on India by employing a synthetic controls model to show that India has been growing significantly faster than other countries in similar stages of development since 2014. Next, I determine through ordinary least squares regressions that the bank accounts and debit cards provided by the JDY are being utilized since they correlate with an increase in the amount of money in deposits. I then employ two-way fixed effects models using data from the Reserve Bank of India and CDMNext Economic Intelligence Center to investigate how the JDY’s distribution of financial tools affected five macroeconomic indicators: loan growth, tax revenue, capital expenditures, GSDP per capita growth, and wages. I find significant evidence that bank account distribution is correlated with decreases in loan issuance and overall wages. However, I find that bank accounts have no statistically significant impact on capital expenditures, tax revenue, GSDP per capita growth, and contract wages. As for RuPay debit cards, I find that as more people receive debit cards, loan issuance and GDP per capita growth increases. However, debit cards have no statistically significant relationship with capital expenditures, tax revenue, or wages. Lastly, this study examines the political motivations for the JDY and observes whether states that supported the ruling party received financialization tools earlier than other states and if the policy helped the ruling Bharatiya Janata Party (BJP) gain more votes. I find that states that supported the BJP received RuPay debit cards faster, but that bank account distribution was party agnostic. To understand if the JDY helped the BJP gain more votes, I observe how bank account and RuPay debit card distribution shaped changes in voting patterns between the 2014 and 2019 election. I find no changes in voting patterns for the incumbent and opposing parties. Overall, this research contributes to our understanding of the effectiveness of financial inclusion policies in fostering economic development and reducing poverty. While the JDY advanced financial inclusion, there needs to be complementary policies that address the issues of financial literacy, employment, and wages that prevent citizens from saving, consuming, and investing in the future.