What should government prioritize for the upliftment of the poor in India: access to credit or economic growth?

ABSTRACT The present work provides a comprehensive analysis of the effect of two prominent channels of financial-sector development (FSD)—economic growth and access to credit—on the poor in India. Employing panel data analysis for a sample of 15 major Indian states for the period 1999–2000 to 2011–2012, we provide empirical evidence for the effect of the two channels of FSD on poverty ratio, poverty gap ratio, and squared poverty gap in India. The results indicate that while access to credit and growth have reduced poverty and poverty gap in India, it has disproportionately benefitted the population living closer to the poverty line resulting in increased inequality among the poor. Further, while bank credit has a greater beneficial effect on the poor, it also has a greater detrimental effect on the poorest of the poor. The robustness check confirms the validity of the obtained results.