Spatial Impact of Education on Formal Savings in India: A Household-level Analysis

Abstract

This article examines the differential impact of education on financial inclusion in rural and urban India, with a special focus on formal household savings. While education and financial literacy are key to improving financial inclusion, institutional differences between rural and urban areas may mediate their effectiveness. The study first develops a theoretical framework based on the concept of transaction costs to explain savings behavior, and then empirically investigates how educational attainment and banking infrastructure influence formal savings through their effect on transaction costs. The analysis draws on household-level data from the 70th (2013) and 77th (2019) rounds of the National Sample Survey Office-All-India Debt and Investment Survey. Findings from 2013 reveal that in rural areas, improved banking infrastructure enhanced formal savings among less-educated households, suggesting a higher marginal benefit for this group. In contrast, the less-educated urban households fared worse as financial infrastructure improved, implying a crowding-out effect. By 2019, however, a slow convergence emerged between education groups in urban areas, though it lagged behind the rural trajectory. These findings highlight the importance of regionally sensitive financial inclusion strategies. Specifically, strengthening agent-based models, such as India’s Common Service Centres, may promote digital financial access and foster equitable use of formal financial services in urban areas.