India Has More Bank Accounts, But Why Has Inequality Not Fallen?

India’s expansion of financial access over the past two decades has been remarkable. Bank accounts, once unavailable to a large majority of households, have become nearly universal. This transformation has been supported by sustained policy efforts to bring households into the formal financial system.

One might expect such an expansion to be accompanied by a narrowing of economic disparities. Yet household consumption data present an interesting puzzle. While financial access has expanded enormously, consumption inequality has not declined. If anything, it has increased modestly.

Our analysis of nationally representative household data from the All-India Debt and Investment Survey (AIDIS) helps explain this apparent contradiction. The important change is not simply in the level of inequality, but in where that inequality lies.

In 2002-03, only about 15 percent of households in our data had financial access. By 2018-19, the proportion had increased to around 91 percent. At the beginning of this period, financially included households accounted for a disproportionately large share of aggregate consumption. The 15 percent of households with financial access accounted for more than 22 percent of consumption expenditure. By 2018-19, this difference had almost disappeared: households with financial access constituted about 91 percent of households and accounted for approximately the same share of consumption. This is an important achievement. Financial access is no longer the economic dividing line that it once was.

Inequality did not disappear. It moved within groups

But there is another side to the story. Overall consumption inequality did not fall during this period. The Gini coefficient increased from about 0.33 in 2002-03 to about 0.35 in 2018-19, while the Theil index increased from 0.214 to 0.228.

To understand this, we decomposed consumption inequality into two components. The first is inequality between households with and without financial access. The second is inequality within these two groups. The results are revealing. In 2002-03, differences between financially included and excluded households accounted for about 8 percent of total consumption inequality. By 2018-19, this component had virtually disappeared. In other words, the difference in average consumption between households with and without financial access had become negligible.

Yet inequality within these groups increased. The within-group component of the Theil index rose from 0.197 in 2002-03 to 0.228 in 2018-19. Its contribution to overall inequality consequently increased from about 92 percent to virtually 100 percent.

This distinction is important. Consider two households that both have bank accounts. One may have secure employment, substantial savings and a high level of consumption. Another may have an account but little savings, irregular employment and much lower consumption. Both are classified as financially included, but their economic circumstances are very different.

As access to bank accounts becomes widespread, therefore, simply dividing households into those with and without financial access tells us progressively less about their position in the consumption distribution.

Other divides remain

The contrast with other household characteristics is striking. Rural-urban location continues to explain a substantial part of consumption inequality. In fact, the contribution of inequality between rural and urban households increased from about 22 percent in 2002-03 to around 31 percent in 2018-19.

Educational differences also remain important. Differences between households grouped according to the educational attainment of the household head accounted for about 26 percent of consumption inequality in 2002-03 and about 22 percent in 2018-19.

These comparisons point towards an important change in the nature of inequality in India. Financial exclusion once marked a relatively distinct group of economically disadvantaged households. As formal financial access has expanded, that particular divide has narrowed dramatically. But differences associated with location, education and other socioeconomic circumstances remain.

Access is only the beginning

None of this should be interpreted as evidence that India’s financial inclusion drive has failed. On the contrary, the disappearance of the consumption gap associated with financial access status is significant. Bringing millions of households into the formal financial system is an important accomplishment. It can facilitate payments, provide a safer place for savings and potentially improve access to credit and other financial services. But the findings also suggest that the meaning of financial inclusion needs to evolve.

When most households were outside the banking system, opening an account was an important policy objective in itself. When almost everyone has an account, account ownership becomes a much less informative measure of meaningful financial inclusion.

The relevant questions now are different. Do households actually use their accounts? Are they able to save regularly? Can they obtain affordable credit from formal financial institutions when required? Do they have access to insurance and other instruments that protect them against shocks? And, crucially, does participation in the formal financial system improve their capacity to invest, accumulate assets and improve their living standards?

A household with an inactive or rarely used account and a household that regularly saves, borrows and makes payments through the formal financial system cannot meaningfully be regarded as equally financially included.

This suggests that the next phase of India’s financial inclusion policy should pay greater attention to the depth and quality of financial participation rather than access alone.

Beyond the bank account

There is also a broader lesson for inequality policy. Financial inclusion can address one important dimension of disadvantage but it cannot by itself eliminate the structural sources of inequality. Differences in education, location and other socioeconomic circumstances can persist even when households have similar access to banking services.

Indeed, the fact that virtually all consumption inequality now occurs within financial access groups makes this point particularly clearly. Two households may both possess bank accounts and still inhabit very different economic worlds.

India’s success in expanding financial access should therefore be viewed as an important first stage rather than the end of the financial inclusion agenda. The policy challenge has shifted from whether households are connected to the formal financial system to what they are able to do with that connection.

The remarkable spread of bank accounts has helped make financial exclusion a much less important dividing line in household consumption. But it has also exposed a more difficult challenge: bringing people into the financial system is considerably easier than eliminating the economic inequalities that persist among them.