COMPUTING A COMPOSITE FINANCIAL INCLUSION INDEX FOR THE INDIAN STATES: A PRINCIPAL COMPONENT ANALYSIS

Abstract

The current study examines the financial inclusion of Indian states by developing a financial inclusion index (FII). The study develops a composite FII using demand and supply-side indicators of financial inclusion. To measure the level of financial inclusion, principal component analysis (PCA) is used as a tool to develop FII by assigning appropriate weights. The study builds an FII for a more extended period from 2006 to 2019. The study finds that most Eastern and North-Eastern states correspond to low financial inclusion ranks from both supply and demand-side. Further, Western and Southern states perform better in terms of financial inclusion from both supply and demand-side. Also, FII demonstrated a positive relationship with HDI. The examination recommends that financial inclusion related thoroughness needs a sensible technique that joins an essential update of the financial system strengthens and develops financial associations, and simultaneously taking care of digitalized training. Our current FII is easy to calculate and can compare economies in terms of financial inclusion over time. Notably, this approach helps overcome criticism about subjective weight determination.