Beyond Principal Component Analysis: Developing a Multidimensional Financial Inclusion Index for BRICS
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Author: Bhawna Rajput, Anupama Rajput and Shilpa Chaudhary
Author Address: Professor, Department of Commerce, Aditi Mahavidyalaya, University of Delhi, Delhi-110039 (India), Professor, Department of Commerce, Janki Devi Memorial College, University of Delhi, New Delhi-110060 (India) and Professor, Department of Economics, Janki
Keywords: Dimensionality reduction techniques, emerging economies (BRICS), inclusive finance, index construction methodology, measurement of financial inclusion.
JEL Codes: C38, E44, G20, O16, O57.
Abstract
This study constructs annual estimates of a comprehensive index of Financial Inclusion (IFI) for the five BRICS countries over the period 2005-2022. Supply- and demand-related indicators for all formal financial institutions are combined using a two-stage Principal Component Analysis (PCA) technique, utilising information from all principal components. In the first stage, three sub-indices representing the dimensions of access, barriers, and usage were computed; in the second stage, they were aggregated to derive the IFI for each country-year observation. The statistical adequacy of PCA was evaluated using the Kaiser-Meyer-Olkin (KMO) test and the Bartlett's Sphericity Test (BTS). The PCA-based IFI was validated by evaluating its correlation with the IFI computed using the normalised inverse Euclidean distance technique. The rankings of BRICS countries varied across the three sub-indices. Russia led in the access dimension; India had the lowest distance barriers, and China led in the usage dimension. In the overall composite index, China emerged as the top performer, followed by Russia, India, and Brazil, while South Africa ranked lowest.
Description
Indian J Econ Dev, 2026, 22(2), 215-226
https://doi.org/10.35716/IJED-25302