Channels of financial sector development and rural-urban consumption inequality in India

Atul Mehta and Joysankar Bhattacharya

International Journal of Social Economics, 2017, vol. 44, issue 12, 1973-1987

Abstract: Purpose - The purpose of this paper is to examine the direct (microcredit), medium-direct (bank credit), and indirect (through economic growth) effect of financial sector development (FSD) on rural-urban consumption inequality (RUCI) in India using state-wise annual data from 1999-2000 to 2011-2012. Design/methodology/approach - A panel data analysis for a sample of 15 major Indian states using the generalized method of moments estimators provides an empirical evidence for the direct (microcredit), medium-direct (bank credit), and indirect (economic growth) effect of FSD on RUCI. Findings - FSD is pro-urban in India resulting in a declining rural-urban consumption ratio (RUCR) and increasing RUCI. The negative effect of FSD on RUCR is greatest through the medium-direct channel followed by the indirect and direct channels. Research limitations/implications - The study questions the social banking initiatives of the government in rural areas where more than 80 percent of the poor reside. There is a need for restructuring financial inclusion programs with a shift in their focus on rural areas and an improved mechanism to target the poor. Originality/value - The paper proposes that formal financial services by banks are primarily availed by non-poor and urban population and hence acts as a medium-direct channel whereas the semi-formal financial services by microfinance institutions specifically target the rural poor and act as a direct channel to affect the poor. It is the first ever study to use state-wise data on microcredit disbursed under Self-help Group Bank Linkage Program to assess the direct impact of FSD on RUCI.

Keywords: Microcredit; Inequality; Financial sector development; SBLP (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijsepp:ijse-05-2015-0117

DOI: 10.1108/IJSE-05-2015-0117

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