Economic Growth and Development

Economic growth refers a positive change in the level of production of goods and services by
a country over a certain period of time. Nominal growth is defined as economic growth
including inflation, while real growth is nominal growth minus inflation. Economic growth is
usually brought about by technological innovation and positive external forces. It can be
measured by comparing gross national product (GNP) or Gross Domestic Product (GDP) in a
year with the GNP or GDP in the previous year.

The term economic development is far more comprehensive. It implies progressive changes
in the socio-economic structure of a country. Viewed in this way economic development
Involves a steady decline in agricultural shares in GNP and continuous increase in shares of
industries, trade banking construction and services. Further whereas economic growth merely
refers to rise in output; development implies change in technological and institutional
organization of production as well as in distributive pattern of income.

Economic Growth & development are two different terms used in economics.
Generally economic development refers to the problems of underdeveloped countries and
economic growth to those of developed countries.

Hence, compared to the objective of development, economic growth is easy realize. By a

Economic development is influenced by both economic and non-economic factors.

 The rate of Capital Formation:

Capital is the crucial factor in economic growth. It is necessary to increase the rate of capital
formation so that the society accumulates a large stock of machines, tools, and equipment
which can be geared into production. The larger the stock of capital, the greater tends to be
the productivity of labour and therefore the volume of commodities and services that can be
turned out with same effort. It is quite reasonable to suppose that in the initial years it is not
possible to set up the rate of capital formation to the full extent by domestic savings. Thus
inflows of foreign capital are necessary for achieving about 7% to 8% growth of national
income.
 Capital-Output ratio:

Another determinant of economic development is the capital – output ratio. The term
capital-output ratio refers to the number of units of capital that are required to produce
one unit of output. The capital-output ratio is different for different industries and
different economies and it varies over a period of time. In the early phase of economic
development when a country is making heavy investment on economic infrastructure,
i.e., on building irrigation works, hydro electric projects, roads, railways, etc., the
corresponding output will be small. But with the passage of time as the power potential
and transport equipment are fully utilised then there shall be a favourable shift in the
capital-output ratio. In the initial years of development when the economic foundations
are being laid, capital-output ratio tends to be unfavourable.

 Marketable surplus of agriculture

The term marketable surplus refers to the excess of output in the agriculture sector over
and above what is required for the rural population to subsist. The concept of marketable
surplus is very important for the development of agricultural markets. Marketable surplus
is different in different commodities. Marketable surplus is a surplus which is available
for sale after meeting i) family needs ii) seed requirement iii) kind wages iv) gifts to
relatives and friends etc. In the case of foodgrains, surpluses are generally low. They
vary from zero (with small and marginal farmers) to 70-80 percent with large farmers
and in surplus areas. In general marketable surpluses in foodgrains are in the range of 45
to 50%. In cash crops and in those commodities which are raw materials of industry,
surpluses are 80-100 %. In fruits and vegetables, which are grown on commercial scale,
surpluses are above 90%. Thus, for the commodities which have large surpluses markets
have to be well-organized and efficient ones. In case a country fails to produce a
sufficient marketable surplus, then there will be no choice except to import foodgrains
which may cause a balance of payment problem.

 Conditions in foreign trade

Liberalisation in foreign trade is essential for economic development. Foreign trade has
proved to be beneficial to countries which have been able to set up industries in a relatively
short period. These countries sooner or later captured international market for their industrial
products. In recent decades, adoption of an export-led growth strategy has enabled countries
like the Republic of Korea, Malaysia, Hong kong and Thailand to register a high economic
growth. In countries like India the macro- economic interconnections are crucial and the
solution of the problem of these economies cannot be found only through the foreign trade
sector.

 Development of Financial sector

Financial sector plays a crucial role for economic development as it channelizes the funds
from savings to investments. It comprises institutions like banks, government and non
government financial institutions, development financial institutions and insurance
companies. It is one of the main pillars of the industry oriented economic system. Financial
Sector of India is intrinsically strong, operationally efficient and exhibits competence and
flexibility besides being sensitive to India’s economic aims of developing a market oriented,
industrious and viable economy. An established financial sector assists greater standards of
endowments and endorses expansion in the economy with its intensity and exposure. In
recent times financial inclusion is crucial for the policy makers to redistribute the growth of
the country. It is the delivery of financial services at affordable costs to sections of
disadvantaged and low income segments of society. It is argued that as banking services are
in the nature of public good, it is essential that availability of banking and payment services
to the entire population without discrimination is the prime objective of public policy. The
term "financial inclusion" has gained importance since the early 2000s, and is a result of
findings about financial exclusion and its direct correlation to poverty. Financial inclusion is
now a common objective for many central banks among the developing nations.

 Economic system:

The economic system and the structure of a country decide the development prospect to a
great extent. The path of growth is not same for all countries. The developing countries in
recent times will have to find their own path of development. They have to follow a capitalist
path of development for efficient production process as well as state intervention for public
distribution system. Thus economic planning is requisite condition of development for
countries like India.

Inclusive Growth:

Governments have a central role to play in building the policy framework required to
stimulate more inclusive forms of growth, including through investment in public
infrastructure and education. They also need to provide the leadership and good governance
required to implement the right policies. Enabling more inclusive growth requires improving
access for the poor to participate in the market either as entrepreneurs or employees, i.e.
through economic opportunities. The great and urgent challenge of the early 21st century –
especially now as we enter its second decade – is to generate inclusive and sustainable
growth.

There is a clear role for government agencies, NGOs and development organizations to help
provide access to basic services, such as education, sanitation and infrastructure. Good
governance and political commitment is needed to achieve this. However, a major obstacle to
the poor moving out of poverty is a feeling of hopelessness that comes from social exclusion
and powerlessness.

We define inclusive growth as a process which entails sustainable and responsible creation —
as well as just distribution of – both wealth and welfare. The notion entails two main pillars
that should be mutually reinforcing:

1. Sustainable & responsible business where opportunities for those excluded from
current growth models are created and where self empowerment is generated.
2. Good Governance involves the provision and distribution of adequate public goods.
It should sustain and frame robustly the two axes above and provide the necessary
secure environment to protect livelihoods.