Empirical studies over the last two decades have established that
financial sector development (FSD) is an important factor for economic growth
besides the existing capital stock and labour.
Although India has been lagging
behind in the formalisation of its economy compared to other similarly placed
countries in the lower-middle income group1 (World Bank, 2017a, 2017b), Kumar
and Radcliffe (2015) note that the impact of initiatives in recent years has
been considerable. One striking example is the period of cash
crunch the economy went through consequent to demonetisation decision in November
2016; the adverse effects of cash crisis
were minimal in some states of India, which had recorded major progress in
digitalization since the mid-2000s since most payments were settled in mobile
money.
The degree of FSD is represented
by financial deepening that is often reflected in the financialisation of
savings through the spread of financial institutions led by commercial banks,
savings and loan institutions, and others. All of them act as intermediaries
between savers and investors for mobilising savings and investing them.
Mobilisation of savings has never
been easy in developing economies, because financial institutions, which were
mostly urban-based, are seen reluctant to go into rural areas on the grounds of
diseconomies. However, recent advances in information and communication
technology (ICT) along with the spread of mobile phones and internet services
have altered the global scenario. The introduction of ICT in developing
economies including India, since the late 1990s helped the spread of access to
mobile voice and data networks across villages and towns, resulting in
innovations across many spheres ranging from labour productivity and
improvements in entrepreneurship skills to innovations in business practices
and service delivery.
One of the most visible areas of improvements is the enhanced access to
financial services such as mobile money, micro insurance and micro venture
capital. All these unlocked the entrepreneurial potential of the unbanked
sections of the population through a reduction in transaction costs.
Although India has been lagging
behind in the formalisation of its economy compared to other similarly placed
countries in the lower-middle income group1 (World Bank, 2017a, 2017b), Kumar
and Radcliffe (2015) note that the impact of initiatives in recent years has
been considerable. One striking example is the period of cash
crunch the economy went through consequent to demonetisation decision in November
2016; the adverse effects of cash crisis
were minimal in some states of India, which had recorded major progress in
digitalization since the mid-2000s since most payments were settled in mobile
money.
In regard to FSD, India among the
South Asian economies has made considerable progress since its economic reforms
in the 1990s.
This study seeks to assess the
impact of FSD supported by ICT, as a contingent factor on economic growth in
India. Specifically, the focus is on investigation whether FSD and ICT are
complements to each other or substitutes.
—Taken from Digitisation
as a Contingent Factor in India’s Financial Sector Development-growth Nexus: An
Empirical Study in Margin:
The Journal of Applied Economic Research
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