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Enhanced financial inclusion and financial literacy are crucial in empowering individuals to navigate financial systems, access credit, and leverage digital platforms effectively.

Financial inclusion in India has traditionally been equated with the expansion of banking networks and the proliferation of bank accounts among the underserved.

However, complete and effective financial inclusion encompasses far more layers than just owning a bank account. It implies, inter-alia access to a comprehensive set of financial services that include savings, credit, insurance, and payments – tailored to meet the diverse needs of individuals, particularly the marginalized and underserved sections of society.

India’s journey towards financial inclusion and literacy has seen considerable progress with the Pradhan Mantri Jan-Dhan Yojana (PMJDY). Nine years post-launch, no-frills bank accounts continue to witness a steady increase, boasting a cash balance of ₹2.03 lakh crore as of 2023. The financial year 2023 saw the opening of 35.9 million new PMJDY accounts, a rise from 28.6 million in FY22 and slightly less than 38.7 million in FY21.

Despite this remarkable surge, a large number of accounts remain inactive or face duplication, signaling the need for more robust financial literacy and engagement strategies.

Between 2014 and 2017, India saw a remarkable 26 percentage point increase in account ownership, largely due to PMJDY, compared to a global increase of 6.57 percentage points only during the same period.

The Global Findex data from 2021 provides an insightful snapshot into India’s evolving financial inclusion landscape, marked by significant digital adoption and changing saving and borrowing behaviors. According to Findex, India experienced a slight percentage decline in account ownership from 80% to 77% from 2017 to 2021, highlighting the need for another round of intensified financial inclusion efforts. This period has also observed a concerning decrease in savings at financial institutions, which declined from 20% in 2017 to 13% in 2021 across all demographics.

Comprehensive financial inclusion embodies the multifaceted access to financial services that cater to the varied needs of the population. India has the second largest number of the world’s population lacking access to formal banking services, totaling 130 million, just next to China.

The mere existence of a bank account again does not guarantee financial inclusivity. A 2017 World Bank report highlighted that about 48% of bank accounts in India were inactive, underscoring the gap between account ownership and meaningful financial participation. The presence of dormant accounts and reluctance to engage fully with financial markets often stem from insufficient financial literacy, a need for ongoing hand-holding of investors, and simplicity of financial products, and unbiased expert advice.

So, how do we encourage more active usage of these accounts?

Credit accessibility remains a critical pillar, with the MSME sector and low-income households often ensnared by the high costs of informal lending despite the availability of microfinance options. Similarly, low insurance penetration highlights the gaps in risk management and protection against unforeseen life events. Investment and wealth-building opportunities through mutual funds, pensions, and government savings schemes represent another dimension of financial inclusion, enabling individuals to secure their financial futures.

Technological advancements in recent years have revolutionized the banking sector, with almost all financial institutions now utilizing technology to expand and improve their services and products. Furthermore, RBI’s Central Bank Digital Currency (CBDC) pilot signals a major move towards adopting digital currency. This has aided financial inclusion with the surge in digital transactions. However, digital literacy and access underscores the need for a more inclusive digital financial landscape.

While digital financial services are penetrating fast into our lives, a large number of inactive accounts demand a focused financial literacy campaign with the availability of simple financial products and unbiased financial advice for maximizing the financial well-being of most of the population.

Enhanced financial inclusion and financial literacy are crucial in empowering individuals to navigate financial systems, access credit, and leverage digital platforms effectively. Tailoring financial products to meet the specific needs of diverse groups, including women, small entrepreneurs, and rural communities are among the tasks unfinished.

Strengthening digital infrastructure, facilitating access to fintech solutions, and innovative and inclusive regulatory frameworks have become essential ingredients of our financial ecosystem, the cornerstone of deepening financial inclusion, and ensuring that financial services are accessible, affordable, and relevant to all segments of society.

The National Strategy for Financial Inclusion (NSFI) 2019-24 sets forth the vision and key objectives of financial inclusion policies in India, with an emphasis on enhancing digital financial inclusion. NSFI, tasked with promoting financial literacy in the country with the ‘5 C Approach’ of the National Strategy for Financial Education (NSFE) which includes- improvement of content, capacity building, community-led model, effective communication strategy and collaborative strategy, is taking further steps in this direction.

The new generation, seeing more frequent global financial transitions and challenges, with an overload of information and social media pressures, is unclear about financial planning. How can we make financial education more engaging and impactful for them?

An online study suggests, over two-fifths of Gen Z and millennials suffer from distorted financial perception. In addition to age-old ways of financial inclusion and giving financial access to the general population, a focused approach to bring clarity or financial planning for youth may be helpful.

Introduction of a 6th C- a class or group-oriented approach to NSFE strategy will help address the unique financial challenges faced by specific groups, such as homemakers, senior citizens/retirees, college students/youths, and school children.

How can we build a deeper trust in financial institutions and financial markets? A simple yet efficient grievance redress system, enhanced trust-building measures and regulatory reforms can address issues like misinformation and fraud that undermine public trust.

Addressing these requires a concerted effort for effective fraud prevention, early detection, and effective communication of the actions taken by regulatory authorities. Setting up a Financial Redress Agency as a unified agency across all financial sectors, as recommended by the Financial Sector Legislative Reforms Commission (FSLRC), will improve grievance redressal and build confidence to stay in the market.

The indispensable role of financial advisors, providing impartial advice with clear disclosures, becomes ever more critical. Unrealistic or biased advice from ‘finfluencers,’ and advisors can cause prospective financial investors to stay away from financial markets.

Financial inclusion in India is a multidimensional challenge. India’s strides in financial inclusion and literacy underscore a comprehensive multi-layered approach to ensuring equitable access to financial services. However, the presence of inactive accounts and the need for a renewed focus on financial education highlight areas for further development.

There is an urgent need to combine financial inclusion efforts with comprehensive sustained financial education efforts and set up a unified grievance redress system. This strategy will support India’s economic growth by ensuring that financial services are accessible to all citizens.

The author is a former official of the Indian Economic Service and IEPF Chair at National Council of Applied Economic Research, Views are personal.

To become a Lakhpati Didi, a critical skill is digital financial literacy — financial knowledge and the ability to take effective decisions

On our way to Kolhapur, we stop at a tea stall-cum-convenience store run by Savita tai (name changed), who greets us with a smile.

While sipping tea, we overhear her discussing the delivery of spices to a shop in Pune. Upon enquiring, she narrates that her ‘gat’ (self-help group or SHG) provided her capital along with training to elevate her tea stall to a small business of convenience store and spice manufacturing.

Slowly, she has been able to increase cash flows and save for her daughter’s college education. Saviti tai is possibly one of the Lakhpati Didis (women SHG members with annual income above ₹1 lakh) mentioned by Finance Minister Nirmala Sitharaman in her recent Budget speech. The Budget has increased the target for the Lakhpati Didi scheme from 2 crore to 3 crore women.

Lakhpati Didis are a part of the 63 million micro enterprises in India, where an informal woman entrepreneur achieves economic empowerment through active labour force participation.

Informal entrepreneurship does not match the prevailing Western idea of an entrepreneur. In developing countries, it describes necessity-based entrepreneurship which creates employment for individuals with low educational levels, little to no work experience, and a lack of access to formal finance and business networks.

Despite such constraints, informal entrepreneurship plays a significant role in augmenting economic empowerment of rural women in India.

Role of SHGs

Supporting rural women in this journey are approximately 83 lakh SHGs. SHG is an informal but self-governed and peer-controlled association of 10-25 people, who come together to find ways to improve their livelihoods and financial wellbeing.

Formation of SHGs is typically facilitated by NGOs such as Self Employed Women’s Association (SEWA) or State Apex SHG bodies such as Maharashtra Arthik Vikas Mahamandal (MAVIM) in Maharashtra or Kudumbashree in Kerala. These organisations support the SHGs not only in accessing capital but in developing skills and agencies.

To become a Lakhpati Didi, a critical skill is financial literacy — financial knowledge and the ability to take effective financial decisions. With the advent of digital technologies and increasing digital banking penetration, financial literacy must now be relooked in a digital context.

Individuals need to supplement their financial literacy with digital skills such as the ability to operate digital devices, conduct financial transactions digitally and be aware of potential frauds. These digital abilities when combined with financial literacy can be termed as Digital Financial Literacy (DFL).

To support SHGs in providing financial literacy training, the financial regulator has formed the National Centre for Financial Education (NCFE) that conducts seminars, workshops and training on financial education.

However, the existing financial education curricula need to be broadened by integrating modules on UPI usage, banking transactions, and fraud awareness.

Hands-on approach

Moreover, such training should go beyond the standard lectures or videos and must be supplemented by hands-on application with banking products made available to the training participants, creating ‘teachable moments’.

Our research conducted on women micro-entrepreneurs points to a strong relationship between DFL and loan repayment and savings behaviour. Therefore, financial institutions should not view DFL training as a CSR activity, but as an integral business function supporting healthy portfolio growth.

DFL has important implications from a macro-stability perspective as well. Strong DFL can be a demand side driver of improved financial behaviour and can complement the recent regulatory tightening on unsecured loans.

According to the RBI’s annual report, during the period 2021 to 2023, while the value of financial frauds has nearly halved to ₹30,252 crore, the instances of frauds increased by 43 per cent to 13,530. Frauds are predominantly attributed to digital payments, underscoring the importance of DFL in securing financial stability.

The regulator, NGOs and financial institutions must make DFL a priority. At a micro level, DFL is an important component of capability development to create empowered entrepreneurs and many more Lakhpati Didis.

At a macro level, DFL can strengthen demand side behaviour which will help in the mitigation of systemic risk and support the nation’s march towards ‘Viksit Bharat’ and ‘Atmanirbhar Bharat’.

Desai is a PhD from IIM Kozhikode and a development sector professional as well as visiting senior fellow at NCAER; Sensarma is a Professor of Economics at IIM Kozhikode.

India aims to reduce agriculture’s ‘self-exploitation’ through non-farm jobs. This requires addressing problems with job laws, promoting direct benefit transfer, improving infrastructure and human capital, and reforming social security and labor codes.

In 1918, B R Ambedkar wrote, ‘If we succeed in sponging off our labour in non- agricultural channels of production… they will cease to live by predation, and will not only earn their keep but give us a surplus.’ More than a century later, the timing couldn’t be better to realise Ambedkar’s dream of India reducing agriculture’s ‘self-exploitation’ through the virtuous cycle of non-farm jobs.

Non-farm jobs fuel consumption and more jobs. However, accelerating farm-to-non-farm transition requires fixing the injustice, inefficiency and incoherence of laws that govern jobs.

Mass prosperity doesn’t arise from government spending. No country would be poor, monetary policy made countries rich – they are, at best, a painkiller or steroid. India’s goal is shifting from poverty to prosperity because of the direct benefit transfer revolution of the last decade. This has improved welfare state efficiency and put a floor under extreme poverty.

Our improved infrastructure – road- building has almost doubled to 30 km a day in the last decade – and human capital (the latest ASER report suggests we have more kids with more years of schooling than ever) provide fertile soil for productivity. The unfinished agenda of transforming our enterprise stack – 6.3 crore enterprises only translate to 25,000 companies with a paid-up capital of more than ₹10 crore – needs three reforms:

Decriminalisation: The most poisonous manifestation of our excessive regulatory cholesterol is the 26,134 jail provisions embedded in employer compliance. These rarely-used provisions have very few CEOs in jail. But they breed corruption, informality and low wages. About 17,819 of these jail provisions arise from job-creation legislation.

Outcomes need teamwork. About 80% of all employer jail provisions arise from state legislation. Unreasonable jail provisions encourage transmission losses between what is written, interpreted, practised and enforced. The recent Jan Vishwas (Amendment of Provisions) Bill 2023 is excellent. But Version 2.0 must raise ambitions (Version 1.0 only discards 2% laws), change philosophy (eliminate every jail provision that does not meet agreed criteria), and incentivise replication by states.

Rationalisation: Employers are asphyxiated by 6,000-plus filings (19% arise from job laws) and 69,000-plus compliances (26% derive from job laws). These laws are a thorn in the flesh for big employers who can afford large teams for compliance. But they are a dagger in the heart for small employers, who often surrender to the reality that you can’t comply with 100% of job laws without violating 10% of them.

Speed matters more than perfection. So, consolidating 42 central labour laws into four labour codes – mostly an aggregation exercise – was sound. But that new regime has not gone live.

The world has changed since the labour code legislation. China factory refugees are looking at India with ambition, even though only 11% Indians work in manufacturing. We should use the delay in notifying the four labour codes to consolidate them into one code that is more straightforward and shorter (shared definitions, etc).

Social security revamp: India’s self- interested trade union movement – which believes job preservation is a form of job creation, and chooses the old over the young – has infected work-linked social security programmes with high costs, low competition and excessive deductions. Consequently, only 0.1 crore of our 6.3 crore enterprises and 7.5 crore of our 55 crore workers make monthly social security contributions. Five design reforms by EPFO are overdue:

Efficiency: Benchmarking costs to gilt mutual funds.

Choice: Making employee contribution voluntary.

Competition: Giving employees the option to pay their contribution to NPS.

Design: Paying into Aadhaar number for portability.

Sustainability: Transfer pension scheme to public programmes and maintain employer-deducted programmes as defined contribution.

Reforming job-creation laws is challenging worldwide as some employers exploit employees. But without employers, there are no employees. And, most employers, especially successful ones, don’t view employees as an expense to be minimised, but as human capital to be nurtured.

Creating mass prosperity needs changing some of the laws that blunt non-farm employment, encourage machines over people and torture job-creators. The farmers’ agitation deserves listening. But if we want to be good ancestors, we can’t meet their demands. Helping them requires the higher financial viability of agriculture, which can only come through modernisation and a massive shift of labour to non-farm jobs.

The labour code delay demonstrates that change is a difficult and controversial job. But as James Baldwin suggested, not everything we face can be changed. But nothing can be changed unless it is faced.

Views are personal.