Digital financial inclusion and transitory consumption: Household-level evidence from India

Recent developments in FinTech have made financial inclusion a policy priority across the globe. Ex-ante, it is not clear whether the effect of digital financial inclusion on households would be similar to traditional inclusion. Using data from household surveys from India, we explore the relationship between financial inclusion and transitory consumption. Our results suggest that, unlike traditional inclusion, digital financial inclusion is associated with higher transitory consumption. However, when considering the distribution of wealth, we find that the association between transitory consumption and digital financial inclusion is stronger at lower levels of wealth. Finally, we explain this heterogeneous effect of digital and traditional financial inclusion by showing that households with traditional financial inclusion experience a greater reduction in borrowing costs compared to those with digital financial inclusion. The oversensitivity of consumption due to digital inclusion highlights the need for digital literacy and policies aimed at curbing predatory and unfair lending practices. • This study distinguishes between traditional and digital financial inclusion. • Results show that digital inclusion is associated with higher transitory consumption, unlike traditional inclusion. • The association between transitory consumption and digital inclusion is stronger at lower levels of wealth. • Traditional inclusion is associated with a greater reduction in borrowing costs compared to digital inclusion. • Oversensitivity of consumption from digital inclusion calls for digital literacy and curbs on predatory and unfair lending.