Bank Credit and Macroeconomic Performances: A TOPSIS-based Comparative Annual Ranking of States in India

Abstract

The financial system of an economy, especially banking, facilitates efficient allocation of resources from savers to borrowers for productive investments, and thus promotes economic growth. State-wise bank credit in India shows a growing divergence, despite the aim of central planning to reach a degree of convergence in macroeconomic performance over time. This chapter analyzes how diverging bank credit affects macroeconomic performances of the Indian states, through an alternative approach of composite indicators-based rankings of states adopting the methodology of TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) that is used in operations research or more specifically MCDM (multiple criteria decision-making). A composite indicator of the states’ annual macroeconomic performances has been constructed taking indicators of output growth, per capita state domestic product, inflation, and fiscal indicators for years 2006–2018. States are ranked by both macroeconomic performance and bank credit to states, and the correlation between the two indicators, known in the literature to be interlinked,is studied here to understand how the availability of credit or lack of it has influenced State level macroeconomic development in India. The results thus show that wealthier and better performing states continue to attract the larger chunk of bank credit, while weaker states have not been able to catch up. An important policy implication would be to place even more emphasis on higher levels of credit growth for weaker states, particularly infrastructure credit, to achieve a degree of income convergence throughout the Indian economy.

Citation

Chattopadhyay, S. and Bose, S. (2023), "Bank Credit and Macroeconomic Performances: A TOPSIS-based Comparative Annual Ranking of States in India", Das, R.C. (Ed.) Inclusive Developments Through Socio-economic Indicators: New Theoretical and Empirical Insights, Emerald Publishing Limited, Leeds, pp. 255-268. https://doi.org/10.1108/978-1-80455-554-520231021