Assessing the (eco)macroeconomic performance index of India: A data envelopment analysis approach

Abstract

The prime objective of this article is to construct a robust macroeconomic performance (MEP) index of the Indian economy using the data envelopment analysis (DEA) approach. Seven major macro indicators, namely, economic growth, employment rate, terms of trade, inflation rate, fiscal deficit, pollution, and climate change are used to compute MEP and Eco‐MEP indices of the Indian economy from 1980–1981 to 2018–2019. Overall, both the MEP and Eco‐MEP index scores have quite similar best performing years worst performing years, and have also captured the major events that affected adversely the Indian economy during the past decades. The trend in the overall performance of the Indian economy was better in the 1980s and the 1990s but has deteriorated since 2000. The autoregressive distributed lag bounds testing approaches to cointegration methods are used to test the robustness/utility of these indices. The estimated results show that MEP and Eco‐MEP have a positive impact on private investment, foreign investment inflows, foreign direct investment, and a negative effect on the current account deficit. Hence, the suggested composite MEP index is stable, robust and truly captures the economic performance of India. The constructed MEP composite index may be used by foreign investors, rating agencies, private investors, and policymakers for their planning and decision‐making processes.