[Solved] Among several factors for India’s potential growth, saving rate is the most effective one. Do you agree? What are the other factors available for growth potential? ( UPSC GS-3 Mains 2017)

[Solved] Among several factors for India’s potential growth, saving rate is the most effective one. Do you agree? What are the other factors available for growth potential? ( UPSC GS-3 Mains 2017)

A savings rate that refers to the percentage of gross domestic product (GDP) savings by households in a country (Difference between income and consumption). It indicates the financial state and growth of the country, as household saving is the main source of government borrowing to fund public services.

  • Contemporary macro-economic framework revolved around growth models and growth a function of both
  • savings as well as investments. Out of them Investment also largely is determined the level of savings themselves.
  • No country has ever grown without a high savings, with the exception of period of colonization, where economies like Britain, got funds through plundering their colonies.
  • China during its spectacular 10% growth phase had savings level in excess of 40-45 percent. Similarly, India had its highest growth during 2001-2008, when savings rate was historically highest. This is not about a coincidence, but a direct causation as understood from harrod-domar model in economics.
  • Saving could be Financial saving (money put in banks, government securities, shares, bonds, pension funds, etc) but other than cash held. The other is Physical saving which could be assets such as real estate, gold and commodities. All Financial Saving are available for investment in Economy

 OTHER FACTORS: The other important component of growth is Investment. Investment in macro-

 economic framework implies increase in capital stock, known as gross capital formation and after accounting for depreciation, as net capital formation. Growth can only be increased with capital formation and thus, the importance of investments in an economy. For e.g., A new MNC decides to set up a new plant leading to increased production, and increase in GDP, it will also lead to greater employment and increased income for the people.

 Similarly, apart from stock of investment, any factor which affects the quality of investment is also considered a contributing factor to growth.

 • Technical improvements through research

 • Labour skill training and improvement

 • Automation

 • Better management techniques

 • Better infrastructure and power supply

 • Stable policy environment

 • Political stability, etc.

  • The savings ratio a big determinant of economic activity. Investment depends on saving rate If people save more, it enables the banks to lend more to firms for investment.
  • An economy where savings are very low means that the economy is choosing short-term consumption over long-term investment.
  • To starve the economy of investment can lead to future bottlenecks and shortages. Therefore, saving rate are most effective determinant. Thus, saving rate is the most effective factor for India’s potential growth.
  • The reduction in saving rate in India because of decline in Private saving and Government saving has been past few years Other factors available for growth potential are following:
  • Foreign investment: it will increase the growth potential of the country. FDI and FII are the routes for foreign investment. FDI not just provides capital but also the technology for carrying out operations in India.
  • Foreign aid: it also helps in boosting investment in the country. It adds to the capital stock of the country.
  • Investment rate: it has also significant impact on the growth of the country. More is the investment, better would be the chances of growth of the economy.
  • ICOR: Incremental Capital Output Ratio (ICOR) is the additional capital required to increase one unit of output. This ratio is used to measure the efficiency of an industrial unit or country as an economic unit.
  • The lesser the ICOR, more efficient the organization. Thus, these factors along with savings rate play important role in boosting the growth potential of the country In India, savings have contributed a lot in the economic development since the Indian economy took off in 1960s and 70s. In the past few decades, it has been around 33% of GDP
  • However, high savings rate is a necessary condition but not a sufficient one for economic development.
  • Many times high savings in isolation does not lead even to capital formation. One also needs sound banking and financial institutions to mobilize the savings of economy. At the same time, presence of entrepreneurship is also critical to convert savings into productive investment. Some other factors that are essential for growth potential are: Infrastructure: Sound infrastructure is needed in terms of good supply of power, electricity, roads, railways and robust means of communication.
  • Ease of doing business: There should be hassle free environment to start and wind up the businesses in the economy. Bureaucratic hurdles in acquisition of land and licenses should also be minimized.
  • Human Resource: Skilled labour force is essential for the improved productive capacity of economy. Capability of human resource depends upon the skills, creativity, abilities and education of the labour force.
  • Technology: It increases the productivity and competitiveness of the economy. Today R&D in every domain is essential to be competitive in the international and domestic market./India’s potential growth/
  • Government policies: Policies decide the pace and direction of economy. India has introduced GST recently to unify its own economy and remove the cascading effect of taxes at multiple points. India’s performance of Ease of Doing Business Index has also improved by 30 points (100th position in 2017) due to many policy initiatives.
  • Social and political factors: Social factors involve customs, traditions, values and beliefs which contribute to the growth of economy. Political factors such as participation of people in formulation and execution of policies enhance the economic development.

 India which is on the verge of reaping the benefits of demographic dividend, must launch skill development initiatives to utilize the young labour force. It should also improve ease of doing business and create a conducive environment for investment, better export performance to improve productivity of the economy./India’s potential growth/

 Further reading..

  • Any country to grow they need an investment, investment comes through two routes one in domestic investments other is foreign investments. For domestic investments we are again depending on banks and other investment schemes like Mutual funds, stock market, trust funds, ETFs etc.
  • MSME sector constitute 45% industrial production and farmers even big industrial hoses mostly depends on Banking sector. Capital to the banks comes from depositors savings, if that saving rate is at low that restrict the lending capacity of banks, which in turn reduce the investment rate finally led to less growth of the economy.

 We can’t blame the only low saving rate to the cause of less growth, because other investment options and foreign investment also play a role in deciding the growth rate. Even if we have a sufficient capital that does not automatically transform into production, various structural issues like land acquisition , labour laws, performance of country in some economic parameters(fiscal deficit, inflation, forex, current account deficit), environmental clearances ,approvals from various departments, skill set of local people, infrastructural facilities ,taxation system, domestic and international demand, monsoon, unhealthy competition from competitors like other factors will decide the growth rate of India./India’s potential growth/

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