Constructing a Composite Index: Assessing Digital Financial Inclusion in India

Abstract

Financial inclusion has been an essential area of focus of the modern-day government. Financial inclusion means providing financial services to each section of society that demands it at an affordable cost. Nowadays, along with the efforts made by traditional financial institutions, the amalgamation of digital technology with finance, called digital finance, has significantly improved the base and coverage of financial inclusion. In India, the coverage of financial services has expanded after the introduction of the JAM (Jan Dhan- Aadhar- Mobile) trinity and the Unified Payment Interface (UPI). The increased internet penetration in the country has also expanded the scope of digital financial services. During demonetisation and the Covid-19 pandemic, digital financial services became a saviour for people and got a boost in its growth in India. The focus of this paper is to measure the level of digital financial inclusion in India. We have constructed a Digital Financial Inclusion Index for India using Principal Component Analysis (PCA). We have included the ‘Access’ (covers the supply side) and ‘Usage’ (covers the demand side) dimensions for this. The data from RBI and the National Payments Corporation of India (NPCI) has been used for the study. The study stresses the increasing role of digital finance in financial inclusion in India. This will guide the policy formulators to take key steps to improve the financial inclusion levels to achieve the goal of sustainable economic growth.