By R. Suryamurthy
India’s political class loves to talk about financial inclusion. Governments boast about hundreds of millions of bank accounts opened under Jan Dhan. Ministers celebrate record digital transactions. Banks advertise their expanding reach. Fintech companies promise to democratize credit. Every budget speech, economic survey and policy document carries some version of the same message: India has successfully brought its excluded citizens into the formal financial system.
The narrative is comforting. It is also increasingly detached from reality. A new study by the National Institute of Public Finance and Policy (NIPFP) lays bare a truth that policymakers would rather not confront: India’s financial inclusion revolution has succeeded in creating customers, not necessarily borrowers; account holders, not necessarily entrepreneurs; participants in the financial system, but not beneficiaries of it.
The most damning statistic in the study is not that 36.16 percent of India’s unincorporated enterprises are fully credit-constrained. Nor is it that another 28.80 percent are partially constrained.
It is that nearly two-thirds of India’s small businesses continue to face significant obstacles in obtaining credit after more than a decade of relentless financial inclusion campaigns, dozens of lending schemes, billions of rupees in subsidies and endless declarations about empowering entrepreneurs.
At some point, policymakers must ask an uncomfortable question: if 65 percent of businesses still struggle to access finance, what exactly has India’s financial inclusion project achieved? The answer appears to be visibility rather than empowerment.
India has become extraordinarily good at counting people inside the financial system. It remains remarkably poor at ensuring the system actually works for them. The contradiction is stark.
The same government that speaks endlessly about entrepreneurship presides over a financial architecture in which the smallest entrepreneurs are systematically disadvantaged. The same policymakers who invoke MSMEs as the backbone of the economy continue to tolerate a credit ecosystem that treats them as an afterthought. The same institutions that describe manufacturing as India’s future continue to starve small manufacturers of capital.
The NIPFP findings expose a reality that economic rhetoric often obscures: India’s credit system does not reward productive potential. It rewards existing strength.
Banks lend most readily to those who already possess assets, records, collateral, scale and financial history. Those who lack these advantages are told to formalize first, grow first, build credibility first—and only then may they qualify for the credit they needed in the first place.
This is not financial inclusion. It is financial gatekeeping disguised as inclusion. Nowhere is this contradiction more glaring than in manufacturing. For years, India has proclaimed its ambition to become a global manufacturing hub. “Make in India” has been marketed as both an economic strategy and a national mission. Policymakers speak of absorbing labour from agriculture, creating millions of jobs and positioning India as an alternative to China in global supply chains.
Yet the study finds that 53.64 percent of manufacturing enterprises are fully credit-constrained. Read that figure again. More than half the sector that policymakers claim will drive India’s economic transformation cannot access adequate credit.
This is not a policy gap. It is a policy failure. The absurdity becomes even clearer when one examines the distribution of loans. Manufacturing accounts for just 15.4 percent of outstanding credit among unincorporated enterprises. Services command over 52 percent. Trading activities receive another 32 percent.
In other words, the financial system is doing precisely the opposite of what industrial policy demands. Capital is flowing not where economic transformation is most needed but where risk is lowest. That may be rational banking. It is disastrous development economics.
The result is a country that wants factory jobs but finances consumption; that talks about production but rewards trading; that celebrates industrialization while denying industrial enterprises the oxygen of growth.
The irony is almost painful. India’s policymakers frequently compare the country with China, Vietnam and South Korea. Yet one lesson from every successful industrial economy is that finance followed national development priorities.
India’s credit system increasingly behaves as though development priorities are somebody else’s problem. The study also demolishes another cherished assumption: that financial exclusion is primarily a rural problem.
For decades, policymakers have designed interventions around the belief that geography is the principal barrier. Rural India, they argued, lacked access to banking infrastructure.
Today, that argument is becoming harder to sustain. Rural enterprises appear less credit-constrained than urban ones. More rural enterprises access formal credit than their urban counterparts.
This should set off alarm bells in New Delhi. The country’s policy machinery has spent years looking in one direction while exclusion has quietly evolved elsewhere.
Millions of urban informal enterprises have fallen into a bureaucratic no-man’s land. They are too small for conventional banking, too complex for microfinance and too informal for formal lending frameworks.
As a result, they exist in a permanent state of financial limbo—visible enough to be regulated, invisible when it comes to support. But perhaps the most troubling findings concern who remains excluded.
Despite years of speeches about women’s empowerment, female entrepreneurs remain significantly more likely to face credit constraints. Despite decades of affirmative-action policies, entrepreneurs from Scheduled Castes, Scheduled Tribes and Other Backward Classes remain disproportionately disadvantaged.
This is where the study moves beyond economics and into the realm of political accountability. Governments routinely announce schemes targeted at women and marginalized communities. Banks proudly publish lending figures. Ministries release impressive statistics about beneficiaries.
Yet the outcomes tell a different story. If women continue to face greater barriers after years of intervention, then either the interventions are insufficient, or they are being measured incorrectly.
If caste-based disparities persist despite decades of policy attention, then policymakers must confront the possibility that the system is addressing symptoms rather than causes. The uncomfortable truth is that India’s financial inclusion debate has become obsessed with quantity.
How many accounts were opened? How many loans were sanctioned? How many beneficiaries were reached? How much money was disbursed? These numbers generate attractive headlines. They also conceal deeper failures.
The real question is not how many loans were given. The real question is who still cannot get one. Unfortunately, that question receives far less attention because the answer is politically inconvenient.
The study’s findings suggest that India’s credit system continues to favor those who are already relatively advantaged—larger enterprises, established businesses, formalized firms, asset owners and socially privileged groups. Everyone else is expected to prove themselves worthy of finance before receiving it.
The logic is circular and self-defeating. Businesses need credit to grow. Instead, they are often told to grow before they can receive credit. Businesses need capital to formalize. Instead, they are often required to formalize before obtaining capital. Businesses need financing to become bankable. Instead, they are expected to become bankable before receiving financing. This is not merely bureaucratic inefficiency. It represents a fundamental misunderstanding of how entrepreneurship works. Successful entrepreneurs are not created after risk disappears. They emerge because someone is willing to finance risk. Yet risk-taking has become increasingly absent from India’s formal credit architecture.
Banks have become better at compliance, documentation and risk management. They have become less willing to perform their core economic function: allocating capital to uncertain but potentially productive ventures. The consequence is visible across the economy.
India possesses one of the world’s largest populations of small entrepreneurs, yet many remain trapped in low-productivity activities because they cannot access growth capital. Businesses that could hire workers remain one-person operations. Enterprises that could expand remain stagnant. Manufacturers that could modernize remain technologically backward.
The economy pays the price through lower productivity, weaker job creation and slower structural transformation. This is why the NIPFP study should not be viewed as merely another academic exercise.
It is a warning. A warning that India may be confusing financial penetration with financial empowerment. A warning that inclusion measured through bank accounts is not the same as inclusion measured through economic opportunity. And perhaps most importantly, a warning that the country’s much-celebrated financial revolution risks becoming a statistical success and a developmental disappointment at the same time.
Until productive credit reaches those who need it most—not merely those who already look creditworthy—India’s financial inclusion story will remain deeply incomplete. The country has succeeded in banking the poor. It has not yet succeeded in financing their ambitions. And that may be the more important challenge. (IPA Service)
