Microfinance can yield both favorable and unfavorable outcomes concerning economic inequality in India. On a positive note, it can contribute to narrowing the income disparity between affluent and impoverished segments of society by furnishing financial prospects and empowerment, particularly to low-income households, emphasizing women.

Conversely, depending on factors such as accessibility, utilization, and repayment of microfinance services, it can also accentuate income disparities, whether between those who borrow and those who do not or among various subsets of borrowers.

• As per the World Bank’s projections, India’s economy is anticipated to achieve a growth rate of 6.9% in the fiscal year of 2023, despite the repercussions of the pandemic. Nevertheless, the pandemic is expected to exacerbate poverty and inequality issues, with approximately one-third of India’s middle class transitioning into poverty and the number of individuals earning less than $2.15 per day doubling.

• According to a report from Oxfam India4, India does not fare well in terms of income equality, as it occupies the 147th position among 157 countries on the Commitment to Reduce Inequality index. The report recommends addressing the expanding economic disparities by implementing progressive direct taxation measures, including the introduction of taxes on wealth and inheritance, and by augmenting public expenditure in the fields of healthcare and education.

• Under research conducted by Crépon et al.1, microfinance’s effects on poverty and inequality exhibit variations based on borrower attributes such as gender, educational background, and occupation. For instance, their findings revealed that in Morocco, microfinance had a favorable influence on the income of male borrowers, while it harmed the income of female borrowers. Likewise, the study indicated that microfinance positively affected the income of borrowers with higher levels of education but harmed the payment of those with lower educational attainment.

• In a separate investigation by Tarozzi et al.2, the consequences of microfinance on poverty and inequality in Ethiopia were scrutinized. Their findings indicated that microfinance had a beneficial effect on the consumption levels and asset accumulation of individuals who borrowed, while simultaneously exacerbating consumption inequality between borrowers and non-borrowers. Moreover, the study revealed that microfinance positively influenced female borrowers’ consumption and asset ownership but did not yield the same impact for male borrowers.

• As per Statista’s market projection1, India is anticipated to witness a reduction in its Gini coefficient, declining from 0.35 in 2021 to 0.34 in 2023. Furthermore, the forecast indicates a decrease in the count of individuals in India earning less than $2.15 per day, with a decline from 0.16 billion in 2021 to 0.14 billion in 2023.

Drawing insights from these data sources, it appears that India has witnessed a recent decline in economic inequality, as indicated by reduced or even negative growth rates in consumption and wealth among wealthier households, coupled with higher growth rates observed among the impoverished segments.

Nevertheless, it’s crucial to note that this trend may not be sustained over time, and its magnitude might not be substantial enough to lead to a significant, long-term reduction in inequality.

Hence, it remains challenging to definitively determine whether microfinance is segregating the nation into distinct economic strata or not. This outcome hinges on a multitude of factors, including the design and dispensation of microfinance offerings, the attributes and conduct of microfinance recipients, and the overarching context and circumstances in which microfinance operations take place.

It’s important to recognize that microfinance does not represent a universal solution for mitigating poverty and addressing inequality; however, it can serve as a valuable instrument when executed with efficacy and responsibility.

Sources:- cairn, Financial Effectiveness and Impact of Micro Finance in Gujrat, Reserve Bank in India, weforum, economicsdiscussion, innovation entrepreneurship, the India forum, The Economic Times