In very simple words ‘economic growth’ occurs whenever people take resources and rearrange them in ways that are more valuable to society. Economic growth may be defined as a rate of expansion that can move an underdeveloped country from a near subsistence mode of living to substantially higher levels in a comparatively short period of time.

Economic growth: It is an increase in the level of output of goods and services that is sustained over a long period of time, measured in terms of value-added.  The term economic growth refers to increases over time in a country's real output of goods and services. The output is generally measured by gross or net domestic product (GDP or NDP), though other measures can also be employed.

Economic growth and development



The term economic growth refers to increases in a country's real output of goods over time and services. The output is generally measured by gross or net domestic product (GDP or NDP)

It implies progressive changes in the socio-economic structure of a country.


  • It enables us to gain a better understanding of an important historical process. For instance, we may want to understand why Britain was the first country to industrialize?

  • Why growth occurs at different rates at different times across countries?

  • Understanding of economic growth process may help in the formation of economic policy.


1. It creates the potential for a wider range for human choice (tangible as well as intangible). In other words, economic growth gives us the freedom to enjoy greater leisure or more material wealth (in the form of goods and services) or some combination of them both.

example 1

2. Rapid economic growth is one of the important instruments to resolve social tensions which tend to result from different segments of populations trying to extract more and more than already have.

example 2

3. Economic growth increases control of humans over their environment and thereby expanding their freedom and horizon. Higher levels of income resulting from rapid economic growth free life from nature’ menaces of death and diseases. 

4. In the process of economic growth, women are likely to benefit far more than men.

example 4

 5. Economic growth also permits mankind to indulge in the luxury of greater humanitarianism as at a higher level of income they can afford to forgo part of their income to uplift others who have not been so fortunate.

6. The economic growth process has been found to by far the most effective tool to alleviate poverty. There is a lot of evidence to suggest that income inequalities tend to worsen at the initial stages as the economy grows but there is very little evidence of worsening of poverty.

example 6



  1. Economic growth is a complex process that generally involves several interrelated factors. Economists stress the importance of three major sources of economic progress:
However, here we must remember that in a country's growth process the role of Economic factors is crucial and decisive. The” stock of capital” and the “rate of capital accumulation” in most cases settle the question whether at a given point of time a country will grow at what pace.

Capital Formation


Capital-Output Ratio


More capital generally means more production, and more Production means more growth. To get capital, countries have to invest and so the level of investment may be a big determinant of future growth. So, Capital formation is of crucial importance in the process of economic growth

The term 'capital-output ratio' refers to the number of units of capital that are required in order to produce one unit of output. In other words, the capital-output ratio reflects the productivity of capital in the various sectors of the economy at a point of time.


In the words of Indian Planning Commission "The level of production and the material well-being a community can attain depends, in the main, on the stock of capital at its disposal, i.e. on the amount of land per capita and of productive equipment in the shape of machinery, buildings, tools and
implements, factories, locomotives, engines, irrigation facilities, power installations and communications. The larger the stock of capital, the greater tends to be the productivity of labor and, therefore, the volume of commodities and services that can be turned out with the same effort

The rate of growth of national income in an economy depends upon the rate of investment and the capital-output ratio.

                                                                                      Investment - Income Ratio Rate of Growth of GDP    =                     __________________________________                                                                                            Capital - Output Ratio

Occupational Structure: Another factor which determines and is determined in due course by the economic growth process is the occupational structure of the working population. Experience from all over the world suggests that in the process of growth, transfer of working force from primary to secondary and then secondary to tertiary sector of the economy has invariably taken place.

Technological Progress: This is perhaps the most widely accepted source of economic growth. This is because technology makes it possible to produce more from the same quantity of resources (or factors of production). This boosts the potential level of output of the economy.

The pace of technological change depend upon

  • The scientific skills of the country

  • The quality of education

  • The amount of GDP devoted to research and development.


  • Inequality of income –growth rarely delivers its benefits evenly. So the issue of distribution of the fruits of the growth process becomes the first important limitation of the process of economic growth. There is evidence to suggest that, at least in the initial stages of development; growth tends to worsen the Distribution of income.

  • Pollution (and other negative externalities) – the drive for increased output tends to put more and more pressure on the environment and the result will often be increased pollution – air, water, and noise. This may be water or air pollution, but growth also creates significantly increased noise pollution. Traffic growth and increased congestion are prime examples of this.

  • Loss of non-renewable resources – the more we want to produce, the more resources we need to do that. The faster we use these resources, the less time they will last. This invariably leads to loss of non-renewable resources like oil, and other minerals, forests, etc.

Government Growth Objectives -Current

  • Steadily accelerate the gross domestic product (GDP) growth rate to achieve a target of about 8% during 2018-23 This will raise the economy’s size in real terms from USD 2.7trillion in 2017-18 to nearly USD 4 trillion by 2022-23. Besides having rapid growth, which reaches 9-10% by 2022-23, it is also necessary to ensure that growth is inclusive, sustained, clean and formalized.

  • The investment rate should be raised from 29% to 36% of GDP which has been achieved in the past, by 2022-23.

  • Exports of goods and services combined should be increased from USD 478 billion in 2017-18 to USD 800 billion by 2022-23.

Current Situation

Economic growth in India has been broadly on an accelerating path. It is likely to be the fastest-growing major economy in the world in the medium-term.

The share of manufacturing in India’s GDP is low relative to the average in low and middle-income countries. It has not increased in any significant measure in the quarter-century after economic liberalization began in 1991.

1. Within manufacturing, growth has often been highest in sectors that are relatively capital intensive, such as automobiles and pharmaceuticals. This stems from India’s inability to capitalize fully on its inherent labor and skill cost advantages to develop large-scale labor-intensive manufacturing.

2. Complex land and labor laws have also played a notable part in this outcome. There is a  need to increase the pace of generating good quality jobs to cater to the growing workforce, their rising aspirations and to absorb out-migration of labor from agriculture.

  • The positive news is that the high growth rate has been achieved with strong macroeconomic fundamentals including low and stable rates of inflation and a falling fiscal deficit.

  • However, along with macroeconomic stability, the sufficient condition for escalating growth is to continue with the structural reforms that address the binding constraints for a more robust supply-side response.

Way Forward

  • Raising investment rates to 36% by2022-23
    To raise the rate of investment (gross fixed capital formation as a share of GDP) from about 29% in 2017-18 to about 36% of GDP by 2022-23, a slew of measures will be required to boost both private and public investment.

  • India’s tax-GDP ratio of around 17% is half the average of OECD countries (35%) and is low even when compared to other emerging economies like Brazil (34 percent), South Africa (27%) and China (22%).

To enhance public investment, India should aim to increase its tax-GDP ratio to at least 22% of GDP by 2022-23. Demonetization and GST will contribute positively to this critical effort. In addition, efforts need to be made to rationalize direct taxes for both corporate tax and personal income tax. Simultaneously, there is a need to ease the tax compliance burden and eliminate direct interface between taxpayers and tax officials using technology. (Recollect CAG Audit On GST)

  • In 2016-17, the share of govt. (central and state combined) capital expenditure in total budget expenditure was 16.2%, and govt.’s contribution to fixed capital formation was close to 4% of GDP. This needs to be increased to at least 7% of GDP by 2022-23 through the greater orientation of expenditure towards productive assets and minimizing the effective revenue deficit.

  • States could also undertake greater mobilization of own taxes such as property tax, and taking specific steps to improve the administration of GST to increase tax collections.

  • The govt. has taken significant measures to attract foreign direct investment by easing caps on the extent of permissible stakeholding and the norms of approval. By 2022-23, the govt. may consider further liberalizing FDI norms across sectors. Domestic savings can be complemented by attracting foreign investment in bonds and govt. securities. Regulatory limits can be relaxed for rupee-denominated debt.

  • The govt. should continue to exit central public sector enterprises (CPSEs) that are not strategic in nature. Inefficient CPSEs surviving on govt. support distort entire sectors as they operate without any real budget constraints. The govt.’s exit will attract private investment and contribute to the exchequer, enabling higher public investment.

For larger CPSEs, the goal should be to create widely held companies by offloading stake to the public to create entities where no single promoter has control. This will both improve management efficiency and allow govt. to monetize its holdings with substantial contribution to public finances.

  • Two areas in which higher public investment will easily be absorbed are housing and infrastructure. Investment in housing, especially in urban areas, will create very large multiplier effects in the economy. Investment in physical infrastructure will address longstanding deficiencies faced by the economy.

  • Private investment needs are encouraged in infrastructure through a renewed public-private partnership (PPP) mechanism on the lines suggested by the Kelkar Committee.

Macroeconomic stability through prudent fiscal and monetary policies

  • Sustained high growth requires macroeconomic stability, which is being achieved through a combination of prudent fiscal and monetary policies.

  • The govt. has targeted a gradual lowering of the govt. debt-to-GDP ratio. It will help reduce the relatively high-interest cost burden on the govt. budget, bring the size of India’s govt. debt closer to that of other emerging market economies, and improve the availability of credit for the private sector in the financial markets.

  • The effective revenue deficit should be brought down as rapidly as possible. Capital expenditure incurred for the health and education sectors, which in effect builds human capital, should be excluded from estimates of revenue expenditure. This will increase govt. savings.

  • One of the major institutional reforms of recent years has been to statutory mandate the RBI to maintain “price stability while keeping in mind the objective of growth”.

  • Inflation needs to be contained within the stated target range of 2% to 6%. Inflation targeting provides a reasonably flexible policy framework which is in line with global best practices and can respond appropriately to supply shocks.

  • The policy should be directed to minimize volatility in the nominal exchange rate.

Efficient financial intermediation 

  • Efficient functioning of the financial markets is crucial to maintain high growth in the economy. There is a need to deepen financial markets with easier availability of capital, greater use of financial markets to channel savings and an improved risk-assessment framework for lending to avoid a situation of large-scale nonperforming assets in the banking sector.

  • Governance reforms in public sector banks required, apart from the establishment of independent and commercially driven bank boards, performance assessment of executives and increased flexibility in human resources policy.

example 7

  • Enable alternative (to banks) sources of credit for India’s long-term investment needs. The bond market needs deepening through liberalization of regulations and continued fiscal consolidation.

Focus on exports and manufacturing

India needs to remain globally competitive, particularly in the production and exports of manufactured, including processed agricultural, goods. The following reforms would help in improving competitiveness:

  • A focused effort on making the logistics sector more efficient is needed.

  • Power tariff structures may be rationalized to ensure the global competitiveness of Indian industries.

  • Import tariffs that seek to promote indigenous industry should come with measures to raise productivity which will provide the ability to compete globally.

  • Improve connectivity by accelerating the completion of announced infrastructure projects. Enhancing physical connectivity will help reduce delivery times and improve global connectivity and the reach of our exporters. By 2022-23, we should complete projects that are already underway such as the Delhi-Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridors.

  • Work with states to ease labor and land regulations. In particular, we should introduce flexibility in labor provisions across sectors. All state governments should speedily implement fixed-term employment (FTE) that has now been extended to cover all sectors.

  • The govt. has recently established a dedicated fund of INR 5,000 crore for enhancing 12 “Champion Services Sectors”. Among others, these include IT & ITeS, tourism, medical value travel, and audiovisual services. Given the significant role of services exports in maintaining India’s balance of payments, the govt. should continue to focus on these sectors.

  • Strengthen the governance and technical capabilities of Export Promotion Councils (EPCs) by subjecting them to a well-defined, performance-based evaluation. Performance evaluations of EPCs could be based on increasing the share of Indian exports in product markets covered by these EPCs. Those EPCs unable to achieve mutually agreed-upon targets for increasing market shares could be closed down or restructured.

  • Explore closer economic integration within South Asia and the emerging economies of South East Asia particularly Cambodia, Laos, Myanmar, and Vietnam, using existing Bangladesh, Bhutan, India, Nepal (BBIN) and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC) frameworks.

  • Building the physical infrastructure and putting in place measures to facilitate seamless cross-border movement of goods in the North-East region would help accelerate integration and promote exports.

Employment generation:

The necessary condition for employment generation is economic growth. Achieving the growth targets by implementing the development strategy can generate sufficient jobs for new entrants into the labor force, as well as those migrating out of agriculture.

A large part of jobs would hopefully be generated in labor-intensive manufacturing sectors, construction, and services. In addition, the employability of labor needs to be enhanced by improving health, education and skilling outcomes and a massive expansion of the apprenticeship scheme.

Also read: ‘Crisis in the NBFC sector could hurt economic growth’

Economic Reforms: Liberalization, Globalization And Privatization
Source: Strategy for new India @75/IGNOU
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