Digital Financial Inclusion and Working Capital Efficiency in Indian MSMEs: Evidence from a Survey Based Empirical Study

The digital financial inclusion has also changed the way micro, small and medium enterprises (MSMEs) access financial services, but there is little empirical evidence that defines how financial inclusion translates into performance gains at the firm level. This paper will look at whether digital financial inclusion positively impacts the financial performance of firms by improving their working capital efficiency of Indian MSMEs. Based on the financial intermediation theory, transaction cost economics, and liquidity management theory, the paper offers a mediation model according to which digital financial inclusion enhances liquidity efficiency, which in turn leads to performance outcomes. The primary survey data was obtained from 300 MSMEs in the manufacturing, retail, and service industries in India. Exploratory factor analysis, correlation analysis, multiple regression, and bootstrapped mediation testing were used to analyse the data. The findings reveal that working capital efficiency (β = 0.54, p < 0.001) is considerably improved by digital financial inclusion, and working capital efficiency (0.62, p < 0.001) is also a strong predictor of the financial performance of a firm. Mediation analysis proves that liquidity optimisation takes place as the key transmission mechanism between digital financial inclusion and financial performance, and a partial mediation takes place. The entire model has a performance variance of 44 percent, which means that its explanatory power is large. The results add to the digital economy literature because they determine that the operational liquidity efficiency is the main conduit through which digital finance boosts MSME performance. At the management level, the research highlights the need to ensure that digital financial adoption is matched with organised working capital policies that would achieve quantifiable financial benefits.