Opinion | Transforming India's Economy: The Power Of Financial Inclusion

Despite these gains, the situation on the ground remains far from ideal. A significant portion of the population still struggles with a lack of financial literacy, limited access to credit, and infrastructural barriers. These issues are worsened by supply-side challenges, such as the reluctance of financial institutions to engage with low-income clients due to perceived profitability issues. Other hurdles include high service costs, insufficient infrastructure, and the restrictive nature of banking correspondents.

One of the most pressing concerns is the lack of sustained engagement with financial services. While the growth of digital payment systems like UPI signals progress, it’s crucial to recognise that simply enabling access is not enough. The real challenge lies in fostering regular use of these services and building financial literacy. An alarming 20% of PMJDY accounts, approximately 103.4 million, remain dormant, pointing to a disconnect between financial access and financial engagement. Moving forward, financial services must evolve to not only provide access but also encourage active participation through campaigns aimed at changing financial behaviour, alongside personalised advisory services and more inclusive products.

A critical barrier to inclusion is the widespread lack of financial literacy. The NCFE Financial Literacy and Inclusion Survey reveals that only 27% of Indians possess basic financial literacy, with regional disparities compounding the issue. States like Goa, Delhi, and Chandigarh have literacy rates above 50%, while regions such as Odisha and Chhattisgarh lag behind, with financial literacy levels as low as 9%. This divide is deeply tied to differing access to education and reliance on informal financial systems.

The role of financial inclusion in driving sustainable economic growth cannot be overstated. By providing low-cost access to financial services, the poor and marginalised can better manage risks, invest in education, and access credit to start or grow businesses. Moreover, targeted interventions in financial inclusion contribute to achieving the United Nations’ Sustainable Development Goals (SDGs), such as reduced inequality, improved health and well-being, and clean energy access. More crucially, it empowers women and youth, two groups traditionally excluded from formal financial systems. For example, promoting financial inclusion among women has been shown to boost their economic independence and overall household welfare. Similarly, youth access to financial products tailored to their unique needs can unlock opportunities for entrepreneurship and career growth.

However, financial inclusion remains a complex, multi-dimensional issue. While India’s Financial Inclusion Index (FI Index) increased from 60.1 in March 2023 to 64.2 in March 2024, signalling positive momentum, there is a clear need for a comprehensive approach that includes digital financial literacy, infrastructural development, and cultural shifts toward formal financial engagement. Rural areas, where 60% of the population resides, remain underserved both in terms of physical banking infrastructure and digital literacy. While rural banking outlets have surged from 67,694 in 2010 to 16.48 lakh by December 2023, rural areas still account for only 30% of all banking outlets. This gap is exacerbated by the digital divide: only 25% of rural households have digital literacy compared to 61% of urban households, which limits their ability to engage with modern financial systems. Without addressing these disparities through widespread digital literacy programmes and infrastructure development, rural India will remain excluded from the digital economy.

Moreover, financial institutions often view low-income populations as unprofitable, leading to higher transaction costs, complex processes, and minimal engagement with this demographic. Simplifying documentation requirements, lowering transaction fees, and designing financial products for low-income groups—such as microinsurance and low-fee savings accounts—are necessary steps in ensuring that financial systems serve everyone. The government’s initiatives, including the National Strategy for Financial Inclusion (2019-2024) and the National Centre for Financial Education (NCFE), are commendable, but they fall short of addressing the root causes of financial exclusion, which lie in regional disparities, limited physical infrastructure, and social barriers.

For India to achieve true financial inclusion, the approach must be holistic. Financial literacy, particularly among women, youth, and rural populations, is key. Expanding grassroots education and financial awareness campaigns will empower individuals to make informed financial decisions. In parallel, simplifying bureaucratic hurdles, reducing transaction costs, and tailoring financial products to the needs of low-income individuals will ensure that the formal financial system works for all. Financial institutions must be incentivised to engage with underserved communities by creating accessible, affordable products. Similarly, fostering a culture of responsible borrowing and repayment is essential to ensuring the success of financial inclusion initiatives.

In conclusion, while India has made significant strides in financial inclusion, much remains to be done. A multi-pronged, inclusive approach focused on financial literacy, infrastructure, digital literacy, and accessible products will be crucial in bridging gaps and powering India’s journey toward sustainable, equitable economic growth. The vision of a financially inclusive India, where all citizens can access the tools for economic mobility, is within reach, but it requires continued commitment, innovation, and a concerted effort to leave no one behind.

V Vijaya Sai Reddy is Floor Leader, YSR Congress Party, Rajya Sabha. Views expressed are those of the author. They do not necessarily reflect News18’s views