The Impact of Digital Financial Inclusion on Income Inequality in Rural India: A Spatial Econometric and Mixed-methods Analysis

This study investigates the relationship between digital financial inclusion and income inequality across rural districts in India from 2015 to 2023. Employing a mixed-methods approach, we develop a novel Composite Digital Financial Inclusion Index (CDFI) and use spatial econometric techniques to analyse data from 500 rural districts. Our findings reveal a significant negative relationship between digital financial inclusion and income inequality, with notable regional variations. A one-unit increase in the CDFI is associated with a 0.243 decrease in the Gini coefficient, considering both direct and spillover effects. The strongest impact is observed in Western India, while the weakest is in the Eastern region. Qualitative insights from 50 key informant interviews highlight the crucial role of cultural norms, infrastructure and financial literacy in shaping the effectiveness of digital financial services. The study also uncovers potential risks, such as over-indebtedness, associated with increased access to digital financial services. Our results underscore the need for tailored, context-specific approaches to digital financial inclusion initiatives and emphasise the importance of complementary investments in infrastructure and financial literacy to maximise the potential for reducing income disparities in rural India. JEL Codes: O18, I32, D31, C21