Title: Financial Inclusion and Household Welfare: An Entropy-Based Consumption Diversification Approach
Discussant: Arpit Gupta

We conducted the 23rd CPHS Research Seminar on October 27th, 2022 at 6.30 PM IST

Event Summary:

Manisha Chackrabarty (IIM Calcutta) and Subhankar Mukherjee (IIT Kanpur) presented their paper on financial inclusion and household welfare in India. The webinar was attended by around 70 participants. The audience contributed several engaging questions and comments throughout the session.

There is empirical evidence that greater financial inclusion increases access to credit and savings, as well as enhanced production and employment opportunities. Whether this in turn improves the economic welfare of households has not been studied widely. The authors presented their research on the link between financial inclusion and welfare. They investigated the impact of the PMJDY scheme introduced by the government in 2014, on the welfare of Indian households.

The authors used diversification of consumption as a measure of household welfare, following the logic of Engel’s Law. They employed Hausman-Taylor estimation and Theil’s diversification index on CPHS panel data to identify consumption diversification before and after the introduction of PMJDY. Their results indicate that consumption diversification increased following the introduction of the scheme. This increase was more pronounced in non-food consumption, across urban and rural India. They highlight that socially vulnerable groups seem to be able to diversify within food consumption but are unable to shift from food to non-food consumption expenditure. The authors conclude that state-led financial inclusion programs can lead to greater household welfare and that further research on the matter can support targeted policy intervention.

Arpit Gupta from New York University served as discussant for the paper. Gupta appreciated the interesting link drawn between financial inclusion and welfare. He identified the idea of substitution from lower income elastic goods to higher income elastic goods as particularly noteworthy. Gupta presented three specific suggestions for the study. More precise tests were suggested to isolate the specific role of financial inclusion on household outcomes from other background trends. Gupta also discussed the use of income and occupational variables available in CPHS, in order to explore additional mechanisms of increased welfare. This could also shed light on the impact of financial inclusion on firms.

Both authors responded to the comments and discussed scope for further work on the topic. The session concluded with the authors and discussant responding to final questions and comments from the audience.

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