Microcredit Access and Multidimensional Poverty Dynamics: Longitudinal Evidence from Indian Households

Abstract

Microcredit is one of the significant mechanisms of financial inclusion for the alleviation of household poverty in developing economies. Its links with multidimensional poverty dynamics are, however, not fully understood. The present study analysed the relationship between Micro credit borrowing and multidimensional poverty of Indian households with longitudinal data from 2016-2019. Multidimensional poverty scores were used to measure household deprivation, descriptive statistics, poverty transition analysis, and household fixed-effects regression were used to explore the patterns and differences in borrowing over time. The results showed significant decreases in average poverty scores for those who borrowed and those who did not borrow. Borrowers saw a drop of 0.1496 to 0.1496, while the non-borrowers saw a drop of 0.1554 to 0.1554. A negative value for the association between microcredit borrowing and multidimensional poverty was found through fixed-effects estimation programme, as it was statistically significant (β = −0.005519) and the estimated value was relatively small. A provisional poverty threshold was used to identify poverty transitions, using a sample of households at both ends of the poverty distribution, which found 437 exits and 49 entries. These results indicate that the participation in microcredit is complementary but not a substitute to other poverty alleviation policies in order to tackle structural deprivation. Integrated Financial Inclusion, Livelihood Development and essential service interventions are still needed. More longitudinal studies are needed to validate causal relationships and assess long-term improvements to households' well-being.