New Delhi: In December 2024, The Reporters’ Collective exposed how the Union government manipulated a poverty index to claim that 25 crore Indians were lifted out of poverty since the Narendra Modi-led Bharatiya Janata Party (BJP) came to power in 2014. 

Our investigation revealed that these statistics heavily relied on new bank accounts opened for the poor, which in turn was used as a key measure to show poverty reduction in India. However, a recent paper on India’s financial inclusion story highlights a major flaw: a significant proportion of these accounts remain inactive, undermining their impact.

The two narratives – declining poverty and record opening of bank accounts under the Pradhan Mantri Jan Dhan Yojana – fall apart under closer scrutiny. The illusion lies not in the number of accounts opened but in treating these accounts as evidence of poverty reduction.

In August 2024, the Union government proudly celebrated what it called a decade of “successful implementation” of its National Mission for Financial Inclusion. This mission, launched in 2014, aimed to bring India’s poor “into the economic mainstream” by encouraging them to open bank accounts.

Union Finance Minister Nirmala Sitharaman declared, “The success of the initiative is reflected in 53 crore people being brought into the formal banking system through the opening of Jan Dhan Accounts.” The Ministry of Finance, in its celebratory press release, called the campaign “the world’s largest financial inclusion scheme,” and highlighted its “transformative impact” along with the digital innovations that have supposedly revolutionised financial inclusion in India.

In December 2024 economist and researcher Suyash Rai published a paper on financial inclusion titled Economic Development and Digital Transformation: Learning from the Experience of Aadhaar and Financial Inclusion in India. His paper, based on publicly available data, pokes holes in the government’s claims. It exposes a striking paradox in the Modi government’s flagship scheme: while a record number of bank accounts have been opened, a significant proportion remain inactive. 

In fact, India ranks dead last among middle-income countries when it comes to bank account activity. In 2021, for example, 35% of Indian respondents for a World Bank index reported inactive bank accounts. The median for middle-income countries on account activity was 7%, the paper notes.

The success of the scheme, in other words, rings hollow. This isn’t just a minor glitch – it’s a glaring contradiction that raises larger questions and has wider implications.

“If you look only at the accounts opened then this claim (on poverty reduction) is misleading,” Rai told The Collective. “You should measure whether the accounts are actually being used and eventually how this usage is impacting account holders. In a country where the majority of banking is owned by the government, it can simply get accounts opened by issuing diktats. And then that’s that.”

Empty Inclusion

The paper lays bare an uncomfortable truth: while the government-mandated financial inclusion efforts have led to near-universal account ownership, the reality of account usage tells a disconcerting story.

So, what went wrong?

According to Rai, a key reason for this shortcoming is the government’s “top-down” approach to financial inclusion.  

Between 2014 and 2024, over 53 crore bank accounts were opened under the Jan Dhan Yojana. But this race to open accounts “created a mismatch” between the methods the government adopted to achieve financial inclusion and the actual needs of the people. It also stretched limited banking resources.

What’s troubling is that the government chose this aggressive route while it knew this approach wasn’t likely to work.

Pilot studies conducted in 2006-07 – in Karnataka’s Gulbarga district and Tamil Nadu’s Cuddalore – had already shown the pitfalls of this strategy. 

Rai points out: “The Gulbarga study found that only 5 percent respondents who had bank accounts made regular deposits in them, while 57 percent had never made a deposit.” In Cuddalore, the study found that only about 15 percent of the accounts were operational a year after they were opened.

“These studies show that, since the banks were responding to pressures from the regulator and the government, achieving real financial inclusion was not a priority. They were looking for success in account opening and in delivering direct cash transfers. They did not even tell many of the users about other uses of a bank account,” Rai observes.

A similar story played out on a national scale. Rai laments that “resources poured into opening and maintaining accounts were wasted because they did not lead to outputs (usage of accounts) and outcomes (positive impact on the economic lives of accountholders and on the larger economy).”

For Rai, this failure of the government’s grand financial inclusion plans is emblematic of its broader approach to policymaking in recent years. “In India, in the last few years, there have been several major policy decisions to pursue ambitious objectives that were defined in such a manner that it seemed that costs did not matter,” he says.

“In 2016, the government decided to demonetize 86 percent of the currency in circulation to curb corruption. In 2020, faced with the radical uncertainty of Covid-19, the government imposed a near-total nationwide lockdown – the most stringent in the world. More moderate and subtle ways of defining the objective and pursuing them were available and were indeed implemented by other countries,” he writes further.

But the government didn’t just overlook the serious flaws in its financial inclusion drive. It also turned it into an opportunity for patting its own back in other areas, as The Collective previously reported.

Rigged Index

In February 2020, the Union government launched the “Global Indices for Reform and Growth” or GIRG exercise. This initiative tasked at least 19 ministries and departments with tracking 30 global indices. The indices covered a range of sectors – from the state of India’s democracy to the level of undernourishment in the country.

Government think-tank NITI Aayog was made responsible for monitoring the global Multidimensional Poverty Index (MPI) and developing India’s own version of the index in partnership with the Oxford Poverty and Human Development Initiative.

Since 2010, the Oxford Poverty and Human Development Initiative has been releasing annual global poverty estimates using the MPI. The United Nations Development Program later joined this exercise. Poverty is measured not just in terms of income or expenditure levels but also across three key dimensions: education, health, and living standards.

Performance on each of the three dimensions is tracked based on a total of 10 parameters – such as “has a child died in the last five years?” or “does the household cook with dung?”

When an individual is found deprived across multiple parameters at the same time, they are considered multidimensionally poor.

The government made one critical change in the methodology for its index.

They added a new parameter to the “standard of living” dimension: if even one member of a household has a bank account or a post office account, the household is no longer considered deprived. Meaning, that with just a bank account, a household can be assumed to not be as poor, regardless of whether they use this bank account or not.   

NITI Aayog was candid about the advantages of creating a homemade index. In an internal note, the Aayog noted: “The computation of a national MPI allows the freedom to choose dimensions and indicators, based on priorities, local contexts, and data availability. National governments have complete ownership over this measure.”

The result? According to experts, the poverty index underestimated India’s poor by at least 3.7 crore compared to the global MPI in 2015-16 alone. 

In January 2024, NITI Aayog claimed that 24.9 crore people were lifted out of poverty between 2013-14 and 2022-23 – the period when Modi was in power – based on this revised methodology.

Unsurprisingly, the indicator showing the most improvement in the decade was “bank accounts”. While over 58% of Indians did not have a bank account in 2013-14, that number dropped to just 3.69%, thanks to the Modi government’s Jan Dhan Yojana.

This made it easier for the government to claim that 25 crore people were no longer poor.

But as Rai’s analysis makes clear, the number of people who opened bank accounts is meaningless without usage.