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Nexus between Fiscal Inclusion and Economic Growth of Nepal

This study is aimed to investigate the nexus between financial inclusion and economic growth of Nepal. This study employs descriptive as well as multiple regression model using the data over the period of mid-July 2014 to mid-July 2021 to examine the linkage between financial inclusion and economic growth of Nepal. The empirical results of the study reveal that there is strong association of financial inclusion with economic growth, however, there is no positive and robust impact of financial inclusion on economic growth of Nepal. In contrary, overall analysis of the study shows the strong evidence to support the view that financial inclusion is the backbone of the Nepali economy. This study covers only limited indicators of financial inclusion and limited periods of data which are not enough to evaluate the long-run relations of financial inclusion and growth of Nepal. This study suggests that policies promoting financial deepening and penetration and reforming the financial sectors to bond with the financial inclusion for economic growth of Nepal. In this study, we attempt to assess the significance of financial inclusion in economic growth so that piecemeal efforts can be made to combat Nepal's policy hitches and logjams.


Introduction
Financial development and its access in the economy determine the level of economic development. The earlier literature also supports this view." Financial growth in excess of real growth is apparently a common phenomenon around the world over time, for any one country as its income per capita increases, financial assets rise relative to national real wealth" (Gurley and Shaw, 1967, p. 257). A study of 35 countries conducted by Goldsmith (1969) over the period 1860 to 1963 concluded that the level of the financial sector of any country expands relative to the size of its economy as it develops financial sector. McKinnon (1973) also supported that the financial development strategically accelerates the economic growth. Thus, the earlier literatures explicitly expressed the saving and investment mechanism of financial system can positively affect the economic growth (McKinnon, 1973;Shaw, 1973). Schumpeter (1934) emphasized the banking sector through productive investment promotes economic growth of the nation. Many literatures concluded that there is strong and long-run association of financial institutions (Dhungana, 2014) and banking sectors (Kharel & Pokhrel, 2012) with economy growth of Nepal. Beck, Levine and Loyaza (2000) found that financial intermediaries play a crucial role to grow total factor productivity and thereby overall GDP growth.
Using the ARDL time series model over the period 1965 to 2018, Paudel and Acharya (2020) assessed the relevance of financial sector improvements in Nepali economy and found that financial development leads to economic growth. However, a similar study of Sri Lankan economy revealed there is no strong evidence that the financial development helps economic growth (Perera & Paudel, 2009). Thus, most of the literatures on the financial system and development support the view of its cause to economic growth. So, it can conclude that the financial development and inclusion are the engine to accelerate the growth of any nation.
Financial inclusion is the results of financial development of any nation. Financial inclusion is the process of entering any individual and entrepreneur into the financial market for using financial products. It can be assured where the proliferation of financial institutions, financial products and service, individual and institutional involvement on banking and financing, financial habits, financial deepening, financial transaction, access of financing, domestic credit by financial mechanism, financial penetration, insurance practice, financial liberalization, fiscal federalism, financial education and awareness, etc. are to be assured. To World Bank (2019), poverty alleviation and inclusive growth are dependent on financial inclusion. Access to transaction accounts pave the way for broader financial inclusion, allowing people and businesses to conduct financial transactions more efficiently and safely, gain access to funds, invest for the future, and cope with economic shocks.
The Strategic Plan (2012-2016) of Nepal Rastra Bank (NRB) strategically accepted the financial inclusion is the major pillar of economic development. The Banks and Financial Institutions Act (BAFIA) is the governing legal mechanism of all the activities of banks and financial institution and it helps to advancing financial inclusion (Pant, 2016). Based on the penetration of banks and financial institutions and 'D class' micro-finance institutions, Dhungana and Kumar (2015) examined the state of financial inclusion in Nepal. In Nepal, the status of financial inclusion is weak and unbalanced, according to this study. As a result of the geographical complexity, banks and microfinance penetration in the Far-Western and Midwestern regions are lower than those in other regions.
Sethi and Acharya (2018) study with 31 countries over the period of 2004 to 2010 to investigate the linkage of financial inclusion on economic growth. The study found that financial inclusion and economic growth are positively and long-term related to one another across 31 countries. Moreover, bidirectional causality showed that financial inclusion drives economic growth. A study concluded that the financial inclusion can accelerate the growth (Subrahmanyam and Acharya, 2017). The level of financial inclusion is associated with the economic development (Sarma & Paris, 2011). King and Levine (1993b) assessed Schumpeter's view about the financial development as the backbone of economic growth using data of 80 countries covering the data from 1960 to 1989 and concluded that there is strong association of major indicators of financial development with real per capita GDP growth.
According to a time series analysis, the financial sector plays an imperative role in the development of the economic activity (Demetriades & Hussein, 1996). Another study of Pakistani economy by applying ARDL concluded that economic growth and financial inclusion are cointegrated and there is a positive effect of it on economic growth in the short-run (Ali, Fatima & Ahmed, 2019). A panel study of Sub Sharan African (SSA) region (Albiman & Bakar, 2021) and ASEAN (Suidarma, 2019) revealed that financial inclusion helps to promote economic growth. Many studies on different economies revealed that the financial inclusion is positively associated with and accelerated the economic growth and development (Kodan & Chhikara, 2013;Van, Vo, Nguyen, & Vo, 2021;Singh & Stakic;2021;Kim & Hassan, 2018;Sharma, 2016;Thathsarani, Wei, & Samaraweera, 2021;Cicchiello, Kazemikhasragh, Monferrá, & Girón, 2021).
Most of the reviewed literatures have been employed the different time series and panel data analysis to estimate the nexus between financial inclusion--proxied by financial penetration, domestic credit by bank, branches of banks, etc. and economic growth--proxied by growth of real GDP. After reviewing the relevant literatures, it is found that there are no proper and sufficient studies about Nepali context. This is the motivation of this paper and it has attempted to fill the gap. In this paper, the multiple regression model has been applied to identify any evidence about the view that the financial inclusion can cause economic growth of Nepal. Thus, the purpose the paper is to evaluate the nexus between financial inclusion and economic growth of Nepal. The rest of the paper is well organized with methodology, results and discussion, and conclusion.

Research Methods and Materials
Based on the quantitative method, this study has attempted to objectively know about any cause of financial inclusion on economic growth of Nepal. To examine the relationship between financial inclusion and economy of Nepal, descriptive analysis as well as multiple linear regression model are employed. This study covers only 8 years data from mid-July 2014 to mid-July 2021 and they were adopted from the economic survey of Nepal for the fiscal year 2020/21 published by Ministry of Finance of Nepal and world development indicator (WDI) from the website of World Bank. In this study, economic growth (RGDP) proxied by annual growth rate of real gross domestic product is the explained variable. Branch of bank and finance companies (BBF) including branches of commercial banks, development banks and finance companies; number of deposit accounts per 100,000 population (DAs); mobile banking service users (MBU); number of branches per 100,000 population (NOB); and domestic credit to private sector by banks as % of GDP (DCP) are the regressors as proxied to financial inclusion in Nepal. Meanwhile, inflation (INF), that influences the estimated relationship, is taken as the control variable in the model. To investigate the expected relationship between variable of interest, the specified model is RGDP = a0 + a1 BBF + a2 MUB + a3 DAs + a4 NOB + a5 DCP + a6 INF + ε

Results and Discussion
As increasing the financial deepening in the economy, financial sectors could be the engine of the economic development. It accelerates the economic growth of the economy by optimal utilizing of financial resources. Financial access and uses insight the level of public involvement in financial sectors. Financial inclusion is the results of fiscal federalism and fiscal literacy. The overall summary of the financial indicators of financial access in Nepal present in the Table 1. Note. Data are adopted from economic survey of Nepal, 2020/21.
As shown in the table, number of the branches of banks and financial institutions have been increasing trend till the data. In contrary, population per bank branch is gradually diminished. Table also shows that the number of deposit accounts and number of loan accounts are increasing year by year. Meanwhile, mobile banking and internet banking service users are also increasing. The observation of data of last five fiscal years fiscal access reveals that that there is increasing trend of number of ATM, debit cards and credit cards in Nepal. It is also clear from the above table that the number of deposit account per lakh population and number of ATMs per lakh population are in fluctuating trend but later on it is in the increasing trend. Number of branches per lakh population are falling in the resent years. However, the number of debit and credit cards per lakh population are increasing in the Nepali economy. The table shows that the financial deepening, access, penetration, and thus financial inclusion are increasing trend in Nepal.

Table 2
Pearson Correlation Matrix The table reveals that there is positive relationship between RGDP and NOB. It indicates that any rise in number of branches per 100,000 population (NOB) causes to raise the real gross domestic product (RGDP). However, all other variables--BBF, INF, MBU, DAs, DCP have inverse relationship between RGDP. This implies the opposite relationship of those variables with RGDP. The table thus elucidates that there is strong and significant relationship between all the variables of interest except DCP with RGDP that confirms the financial penetration is not satisfactory in Nepal.

Multiple Regression
To fulfil the objective of the paper that the dependability of variables of fiscal inclusion and predicted variable, RGDP, the multiple regression was employed. It is used under the study to investigate the relationship of predictors on RGDP. To estimate the linear regression under the study, all requested variables were entered. The summary of regression result is presented in the Table 3. The results of regression shows that the relationship between six different independent variables--BBF, MBU, DAs, NOB, INF, and DCP each of with single dependent variable--RGDP. Generally, unstandardized coefficients (Beta) confirm the relationship between predictor and predicted variable. Table also Table 3 also shows the value of R 2 is 0.933. It indicates that 93.3% of RGDP variation is explained by the regressors--BBF, MBU, DAs, NOB, INF, and DCP. Similarly, 0.528 value of adjusted R 2 concludes that the fiscal inclusions indicators explain 52.8% of the change in real GDP. The p-value of one-way ANOVA coefficient (F = 2.306) is less than 5% level of significant reveals that there is no significant relationship between explanatory and dependent variables.

Conclusion
The purpose of this study is to evaluate the nexus between financial inclusion and economic growth of Nepal by using data only from mid-July 2014 to mid-July 2021. In this study, economic growth (RGDP) proxied by annual growth rate of real GDP is the dependent variable, whereas branch of BBF; DAs; MBU; NOB; DCP are taken as the explanatory variables as proxied to financial inclusion in Nepal. INF, that influences the anticipated relationship, is taken as the control variable in this model.
The study elucidates that the financial deepening and inclusion indicators--the number of deposit accounts; number of loan accounts; mobile banking and internet banking service users; number of ATMs, debit cards, and credit cards; the number of debit and credit cards per lakh population; the number of the branches of banks and financial institution are increasing year by year. The number of deposit account per lakh population and number of ATMs per lakh population are in the increasing trend in recent years. However, number of branches per lakh population and population per bank branch are falling in the resent years. The study concludes that the financial deepening, access, penetration, and thus financial inclusion are increasing trend in Nepal.
The study reveals that there is positive relationship between RGDP and number of branches per lakh population (NOB). However, all other variables--BBF, INF, MBU, DAs, DCP have inverse relationship between RGDP. The study, thus, elucidates that there is strong association between all the variables of interest except DCP with RGDP that confirms the financial penetration is not satisfactory in Nepal. The study also concurs that there is no significant relationship between the independent variables of fiscal inclusion with RGDP. This study also demonstrates the MBU, NOB, and DCP have positive impact on RGDP but not remarkable. Conversely, branch of banks and financial institution has negative impact on RGDP. On the other hand, DAs cannot cause any change in RGDP. It is also shown that INF also negatively impact on RGDP. Thus, the overall analysis of this study concludes that there is no positively significant impact of financial inclusion on economic growth of Nepal. But there is strong evidence to support the view that financial inclusion is the backbone of the Nepali economy. Subsequently, the policy makers and government of Nepal should have needed huge policy endeavor to increase financial access, financial penetration, widening the productive financial services, and financial literacy to accelerator economic growth of Nepal.