### CHAPTER 2: CONCEPTIONAL FRAMEWORK, NATIONAL AND INTERNATIONAL SCENARIO

- 2.1. Conceptual framework

This chapter looks at conceptual framework of financial inclusion. In this chapter we will discuss various dimensions of financial inclusion. What are the likely causes of low financial inclusion and what are various barriers to inclusion, elements and expected outcomes of financial inclusion will also be highlighted. How poor people are trapped in financial exclusion cycle will also be reviewed in this chapter. Finally we will be discussing various measurement approaches of financial inclusion and we will also review the indices developed by various committees and researchers for measuring financial inclusion. Over the past decade, India has enjoyed strong economic growth and prosperity. Its gross domestic product (GDP) has averaged nine percent growth year on year for the past five years, earning a reputation as an emerging economic power. India is now the world's largest economy and fourth in terms of purchasing power parity (PPP), which is largely due to the increase in the size of its middle class consumer population. There are twice as many billionaires in India than in Japan and as many as in Germany, second only to the United States. India's growth; however, is challenged by the disproportionate distribution of income and the disparity between the rich and poor. More than half the country's wealth is shared by only 10 percent of the population. In 2005, 42 percent of the population still struggled to live on less than US $ 1.25 a day, the same proportion who survived on less than a dollar a day a quarter century earlier'. This uneven growth has resulted in the exclusion of 51 percent of the country's population (560 million people) from formal sources of finance services, which is identified as a key cause of poverty, together with illiteracy, and a lack of access to social benefits, productive assets, and inadequate healthcare. India's continued growth can only be assured if steps are taken to ensure that the social and economic development is inclusive. The governments of India and other developing countries have made Financial Inclusion a priority - evidenced by policy development, regulatory reform and new funding vehicles. The government of India has a set a target of reaching full inclusion by 2015. These objectives are being reached through 34 financial instruments, such as microcredit, which have achieved positive results, helping thousands of the world's poor to lift themselves out of poverty. Globally, public recognition of the value of financial inclusion came when Dr. Muhammad Yunus, founder of Bangladesh's Grameen Bank, was awarded the 2006 Nobel peace prize for his work in bringing microfmance to the poor. The concept of inclusive financing is dynamic and has evolved significantly since its inception. Once viewed as means to tackle poverty and reduce income inequality, today the concept has developed into an important pre-requisite for financial stability and economic development. Inclusive financial systems allow producers and households to smoothen their production and consumption of goods and services through which income is generated in an economy. Thus, financial inclusion drives income generation through increasing productive capacity especially among those without assets to start with and facilitates inclusive growth. • The over -reaching and cross-cutting nature of financial inclusion has made it one of the