Finance and Poverty: Evidence from India

Using state-level data from India over the period 1983 to 2005, this paper gauges the effect of financial deepening and outreach on rural poverty. Following the 1991 liberalization episode, we find a strong negative relationship between financial deepening, rather than financial breadth, and rural poverty. Instrumental variable regressions suggest that this relationship is robust to omitted variable and endogeneity biases. We also find that financial deepening has reduced poverty rates especially among self-employed in the rural areas, while at the same time it supported an inter-state migration trend from rural areas into the tertiary sector in urban areas, consistent with financial deepening being driven by credit to the tertiary sector. This suggests that financial deepening contributed to poverty alleviation in rural areas by fostering entrepreneurship and inducing geographic-sectoral migration.