influence basic monetary policy choices, including which price index to target. Empirical research appears to suggest that inflation measures excluding food prices may be a poor guide to policy for economies with low levels of financial inclusion. This is the outcome of Engel’s law which states that at low levels of income, expenditure on food often dominates the budget of low-income households. When food prices rise, these households, lacking access to the financial sector, do not save the extra income, but instead increase consumption, in turn raising inflationary pressures.
Fifth, greater financial inclusion also strengthens the case for the interest rate channel of monetary policy. When financial inclusion is low, a large share of the money stock is typically accounted for by currency in circulation, with cash being the dominant mode of savings by households. As financial inclusion improves, consumers relocate their savings away from cash and into deposits. Given that the rewards for saving are affected by interest rates, greater financial access implies that a bigger share of economic activity comes under the purview of interest rates, making them a more potent tool for policymakers (Cecchetti and Kharroubi, 2012).
As governments become more actively involved in the financial inclusion agenda, a key challenge is defining roles for government in creating the broader and interconnected ecosystem of market actors needed for safe and efficient product delivery to the poor. The IMF (2014) has identified three major roles that have the potential for significant impact: (i) promoting healthy competition (promoter), (ii) creating an enabling regulatory environment (enabler), and (iii) strengthening financial infrastructure and driver of transaction volume (developer). While each of these roles can have significant impact, the application of these roles in any given jurisdiction will depend on country-specific factors, such as customer demand, market structure and maturity, and government policies.
Concluding Remarks
The goal of financial inclusion which is being currently pursued in India is a challenging one. Considerations of regulation, competition, and ownership in an integrated manner, enhanced oversight of financial markets, and a proactive focus towards financial infrastructure are all working together to help achieve the task of furthering financial inclusion in the country.
At a broader plane, driven by manifold developments, including technological advancements, there has been a marked progress in financial inclusion in the BRICS. The progress is far more in regard to account ownership as compared with use. Some of the reasons are economic, while others are more structural in nature. Newer and innovative ways of addressing these challenges are emerging, which holds the promise of greater financial inclusion, going forward. The FINDEX 2017 notes that two-third of unbanked adults have a mobile phone. While this holds the promise of reaching out to the unbanked in a cost-effective manner, it also raises the possibility of cyber risks that can impede the financial inclusion momentum. Addressing the challenges involved while reaching out to the last mile holds the promise of a greener tomorrow for the unbanked populace.
Acknowledgments
A part of the work was done when the author was working with the Centre for Advanced Financial Research and Learning, Mumbai, India. Useful suggestions from Partha Ray on an earlier draft are gratefully acknowledged. Needless to state, the views expressed and the approach pursued in the paper are strictly personal.
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