Exploring the relation between micro-lending and economic growth - evidence from Indian macro environment

Mixed results on the impact of microfinance continue to create concern among the policymakers due to the opportunity cost of the resources allocated towards micro-lending. While microfinance reduces income inequality, it becomes necessary to know its effect on economic growth, as income equality and growth are negatively correlated in developing economies. We hypothesise that microfinance leads to the economic growth of the nation at the macro level, using India's state wise panel data extracted by exploiting the database of Microfinance Institutions Network and database of the Reserve Bank of India. The study uses a random effects instrumental variable model to deal with the endogeneity and state and time effect involved due to bi-causality and panel data respectively. Results obtained, suggest that micro-lending has a significant and positive impact on the economic growth of a nation, which implies that microfinance can also contribute towards positive economic growth along with its role of reducing income inequality.