Benchmarking economic performance of Indian States through supply and demand side financial inclusion indices: a DEA approach

Abstract

Financial inclusion plays a vital role in financial development and in achieving developmental goals. This study assesses the performance of Indian states using a multidimensional Financial Inclusion Index (FII) as an input and economic growth as the output variable. The study computes the supply and demand sides of the FII for 27 major Indian states from 2010 to 2021. Utilizing the supply and demand side FIIs as inputs and the actual net state domestic product as the output, non-parametric Data Envelopment Analysis (DEA) models are applied to measure the technical efficiency of states. The results show that Goa and Tamil Nadu lead in the respective supply and demand-side indices. Moreover, Maharashtra exhibits high performance and serves as a benchmark for other states in both the Constant Returns to Scale (CRS) and Variable Returns to Scale (VRS) DEA models, consistent with the FII indices of these states. The findings of the study suggest that most states are operating at lower levels of financial inclusion, and that deepening financial services will enhance scale efficiency. Therefore, along with improving financial services in economically disadvantaged and underperforming states, focus should be given to moderating factors such as human development, infrastructure, and institutional quality within the policy framework, which affect the efficacy of FII in promoting growth and explaining the variations in economic performance observed among different states in India. © The Author(s), under exclusive licence to Springer Nature Switzerland AG 2024.