Digital financial inclusion (DFI), the provision of low-cost digital access to financial services, particularly for underserved populations, has gained global recognition. Leveraging the internet's low marginal costs, DFI efficiently spreads inclusive finance, contributing to a robust financial system, poverty reduction, and income inequality mitigation. It's a crucial tool for reducing social inequality and promoting economic growth, especially in developing countries. The banking sector's adaptation to internet technology has led to increased challenges and opportunities in utilizing the internet for service delivery. Small and medium-sized enterprises (SMEs), vital for job creation and economic growth, often face challenges in accessing traditional financial services, particularly micro-enterprises. Digital lending platforms offer a solution, providing credit based on alternative data sources. DFI empowers micro-enterprises by enabling access to digital financial services, insurance, and efficient record-keeping, thereby improving financial stability and growth. However, ensuring data security and privacy is crucial. In India, the government has implemented various technology-driven initiatives like UPI, driving the rapid growth of digital payments. Despite this growth, account dormancy and low usage rates remain challenges. This study aims to analyze the determinants of DFI among Indian micro-enterprises and its impact on the ease of doing business, using the World Bank's ESM 2022 data.

Existing literature highlights the importance of financial inclusion for SMEs, emphasizing the role of access to finance in business performance. Studies show that financial inclusion increases the likelihood of micro-enterprises progressing to more advanced stages of development and contributes to macroeconomic growth. Digital financial inclusion is seen as a solution for addressing the challenges faced by the poor in accessing financial services. While many studies have examined DFI's impact on income inequality, fewer have focused on its determinants among micro-enterprises, particularly in developing countries like India, where MSMEs constitute a substantial portion of the business landscape. Research also explores the role of ICT in promoting financial inclusion, demonstrating that mobile phones and the internet have revolutionized financial service delivery. Studies highlight the influence of firm characteristics (size, age) and owner characteristics (education, experience) on financial inclusion. However, the impact of DFI on the ease of doing business requires further investigation. This study addresses this gap by examining the relationship between DFI and perceived business obstacles among Indian micro-enterprises.

This study utilizes data from the World Bank's Enterprises Survey of Micro Firms (ESM) 2022, collected between December 2021 and March 2022 via a two-stage process involving phone calls and face-to-face interviews with 998 micro-enterprises across various sectors in India. Stratified random sampling was employed. The study measures DFI through two variables: (1) use of digital payments, and (2) use of digital payments to pay utility bills. Explanatory variables include digital resource capability (access to internet and computers/tablets) and firm/owner characteristics (firm age, owner's gender, education level, household size, manager's experience). Descriptive statistics, chi-square tests, ANOVA, and binary logistic regression (due to the binary nature of the dependent variables) were used for data analysis. The logistic regression model examines the relationship between DFI (access and usage) and the explanatory variables, providing regression coefficients, p-values, and marginal effects. The ANOVA compares perceived business obstacles (access to resources, business regulations, market externalities) across micro-enterprises with and without access to and usage of digital finance.

The study revealed that 66% of micro-enterprises had access to digital financial systems, while 85% used digital platforms for payments. ANOVA results showed significant differences in perceived business obstacles between micro-enterprises with and without DFI. Specifically, micro-enterprises with DFI perceived fewer obstacles related to tax administration, business licensing and permits, and labor regulations. However, they perceived access to land as a greater obstacle. Similar analysis for usage of digital finance showed that users experienced fewer obstacles in tax administration, business licensing, and permits. Logistic regression analysis showed that access to the internet, firm age, owner's gender, education level, and household size significantly influenced access to digital finance. Access to computers had a negative and unexpected impact. Internet access, owner's education level (diploma holders), and manager's experience significantly affected the usage of digital finance. Overall, the models indicated that internet access, education, and owner experience were instrumental in DFI among micro-enterprises. The models showed good fit and statistical significance.

The findings confirm the significant role of DFI in mitigating business obstacles and improving the ease of doing business for micro-enterprises. Access to the internet is crucial for both accessing and using digital financial services, highlighting the need for improved digital infrastructure. The positive influence of education and owner experience suggests that enhancing financial literacy programs and managerial skills is important. The unexpected negative effect of computer access might be due to smartphone dominance in digital banking. The study's results provide insights into the factors driving DFI and its impact on business operations. These findings can inform policy interventions aimed at promoting DFI among micro-enterprises.

This study demonstrates the importance of DFI in enhancing the ease of doing business for micro-enterprises in India. Access to the internet, education, and owner experience are key drivers of DFI. Policymakers should focus on improving digital infrastructure, promoting financial literacy, and designing accessible and affordable digital financial services. Future research could explore the long-term impact of DFI on micro-enterprise growth and profitability, and investigate the role of specific digital financial services on different business sectors.

The study's reliance on secondary data from the World Bank's ESM 2022 limits the selection of variables related to business obstacles. Future research could employ theoretical models, incorporate in-depth interviews, and include behavioral aspects of micro-enterprise owners to gain a more comprehensive understanding. The cross-sectional nature of the data prevents causal inferences. Longitudinal studies are recommended to track DFI's long-term impact.