ECONOMIC GROWTH & ECONOMIC DEVELOPMENT

A country’s growth and development are often measured by several economical parameters. Such
parameters such as GDP, HDI, Human Poverty Index, help determine a country’s growth as well as
development. Development can be reflected by the progress of human lives and quality as well;
such as decreases in inequality, unemployment etc. therefore, both growth and development are the
important measurements in a country, as based on that government can make new schemes and
policies to boost their economies of retirement.

DEFINITION OF GROWTH AND DEVELOPMENT IN ECONOMICS

Economic growth is the increase of national income or national output, regarding economic goods
and products compared to one form another time. On the other hand, economic development means
long term economic growth, such as a country having an increased rate of income. Healthcare,
gender equality, can be addressed in developed countries or the developed economy.

DIFFERENCE BETWEEN ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

Economic growth consists of various processes in per-capita income and national income
increasing process. Apart from economic growth, economic development is a much wider concept
that includes social, political, cultural changes and overall development in literature, gender and
other phenomena.

Several factors are related to economic growth such as gradual positive changes in GDP, product
consumption, spending investment of the government and net exports. On the other hand,
economic development is related to the growth of human health, increases inequality and equity,
and quality of life along with purchasing power parity and so on.

Economic growth can be measured by several quantitative factors for example GDP, PPP, whereas
development can be measured by the HDI, HPI, literacy, infant mortality etc.

PRINCIPLES OF ECONOMIC GROWTH AND DEVELOPMENT

Several principles factor that affects economic growth and development are

Natural resources: Natural resources such as land, drainage systems, mines are some factors that
affect economic growth and development. Mercantilism is started here, which defines that the
wealth of a country such as gold, trade surplus can increase the growth.

Capital formation Adam Smith’s theory mentioned the role in increasing return to economic scale.
Capital formation is determined by workers’ activity and savings, where the saving can be speed on
occurring other goods to formulate more capital.
Human resource: neo-classical model is based on human resource labour productivity, workforce
size and factor inputs, where it determines the effective and skilled labour can increase the rate of
growth and productivity. The more skilled the more advanced development occurs in a country in
terms of technology, health etc.

Population growth: population growth is a positive phenomenon of underpopulated countries but as

perMalthusian’s theory excessive population can create food and product scarcity.

DETERMINANT OF ECONOMIC DEVELOPMENT IN INDIA

National Income and Per-Capita Income

National income and Per-capita income are the traditional approaches for measuring economic
development. National incomes are defined as the value of products produced in a country in a
financial year. In India, the GNP (Gross National Income) is Rs. 8.82 Lakh Crs. Additionally, the
per capita is Rs. 150 thousand. As per the c; classification of WDR (World development Report)
India falls under middle-income countries.

IHDI, HDI and GII

IHDI (Inequality-Adjusted Human Development Index), HDI (Human Development Index) and
GII (Gender Inequality Index), India has ranked 100 out of 144 countries, 135 out of 187 countries
and 127 out of 187 countries. These determine that India is still in into stages of development and
need to sustain more equality, women empowerment, minimise gender discrimination, health
improvement etc.

THE TIME WHEN ECONOMIC GROWTH AND DEVELOPMENT OCCURS

Economic growth in a country occurs if a country finds new minerals or natural resources,
increases in workforce qualitatively, increases in machinery and critical systems and with the
advancement of technology. Similarly, economic development occurs, when a developing country,
for example India, gains an increase in PPP, and GDP, IHDI, HDI and GII. Additionally, if India
advances in literacy and educational levels, improves quality in household and amenities, improves
the environmental aspect and sustainability and increases life expectancy, there is a possibility to
gain economic advantages.

CONCEPT OF GDP AND ITS ROLE AS AN INDICATOR

GDP (Gross Domestic Product) is a standard measure amongst value-added production thereof
chase of services and goods in a country. Currently, the GDP of India is 7.8% in the year 2022.
GDP helps to detect the value-added prices in every stage of production, whereas the expenditure
adds up to the value of purchasing and the income is summed up with the incomes that are
generated by production. GDP is a good economical measurement but has some limitations as it
cannot measure underground or hidden taxes, household production etc.

CONCLUSION

The growth and development in literacy rate, life expectancy and infant mortality rate, purchasing
power, and per capita incomes can determine the levels of development and also provide future
recommendations where the country is lacking and what improvement is needed.

EXAMPLE

For instance, China's economic growth story from the late 20th century to the early 21st century
perfectly illustrates this concept. China transitioned from a closed, centrally planned system to a
market-oriented economy that experienced rapid growth. Its real GDP growth averaged about 10%
yearly—the fastest sustained expansion by a major economy in history—and more than 850 million
people were lifted out of poverty. Various factors, including investment in infrastructure,
manufacturing, and a large, productive labour force, drove this growth.
INFLATION

In economics, inflation is defined a sustained increase in the general price level of goods
and services in an economy over a period of time. It is measured as an annual percentage
increase. When the general price level rises, each unit of currency buys fewer goods and
services. This implies that inflation reflects a reduction in the purchasing power per unit of
money. In other words, inflation indicates a loss of real value in the medium of exchange and
unit of account in the economy.
Different definitions of inflations have been given by different Economists some of which
are as
follows:
1. In the words of Peterson, “The word inflation in the broadest possible sense refers
to any
increase in the general price-level which is sustained and non-seasonal in character.”
2. According to Coulborn inflation can be defined as, “too much money chasing too few
goods.”
3. According to Samuleson-Nordhaus, “Inflation is a rise in the general level of prices.
4. As per Johnson, “Inflation is an increase in the quantity of money faster than real
national output is expanding”.
5. Keynes has presented his view that true inflation is the one in which the elasticity of
supply of output is zero in response to increase in supply of money.

TYPES OF INFLATION
Inflation is usually categorized on different basis which are given as below:
A. On the basis of Rate: Inflation has been categorized into following types on the basis of
its different rates:
1. Creeping Inflation: Creeping Inflation also known as a Mild Inflation or Low
Inflation refers to that type of inflation when the rise in prices is very slow like that of snail or
creeper. It is the mildest form of inflation with less than 3% per annum.
2. Chronic Inflation: If creeping inflation persist for a longer period of time then it is
often called as Chronic or Secular Inflation. It is called chronic because if an inflation rate
continues to grow for a longer period without any downturn which may possibly lead to
Hyperinflation.
3. Walking or Trotting Inflation: When prices rise moderately with a single digit of
less more than 3% but less than 10% per annum it is called as Walking Inflation.
4. Running Inflation: A rapid acceleration in the rate of rising prices is referred as
Running Inflation. This type of inflation occurs when prices rise by more than 10% per annum.
5. Galloping Inflation: Galloping inflation also known as Jumping inflation occurs when
prices rise by double or triple digit inflation rates of more than 20% but less than 1000% per
annum.
6. Hyperinflation: when prices rise at an alarming high rate with quadruple or four digit
inflation rate of above 1000% per annum then is termed as Hyperinflation. It is a situation where
the prices rise so fast that it becomes very difficult to measure its magnitude. During a worst case
scenario of hyperinflation, value of national currency of an affected country reduces almost to
zero. Paper money becomes worthless and people start trading either in gold and silver or
sometimes even use the old barter system of commerce. Two worst examples of hyperinflation
recorded in world history are of those experienced by Hungary in year 1946 and Zimbabwe
during 2004-2009 under Robert Mugabe's regime.
 B. On the basis of Causes: Inflation has been categorized into following types on the basis of its
different causes:
1. Demand-Pull Inflation: Demand-Pull Inflation also known as Excess Demand
Inflation takes place when aggregate demand for a good or service outstrips aggregate supply. In
other words, when aggregate demand for all purposes- consumption, investment and government
expenditure-exceeds the supply of goods at current prices then it is called Demand-Pull Inflation.
Demand-Pull inflation gives rise to a situation often economists describe as “Too much money
chasing too few goods”.
Cost-Push Inflation: When prices rise due to growing cost of production of goods and services
then it is known as Cost-Push Inflation. Cost-push inflation also came to known as “New
Inflation” is determined by supply-side factors mainly caused by higher wage-push, Profit-Push
and higher costs of raw materials.
1. Scarcity Inflation: Scarcity inflation occurs due to hoarding by unscrupulous traders and black
marketers so as to create an artificial shortage of essential goods like food grains, kerosene,etc.
with an intension to sell them only at higher prices to make huge profits.
2. Structural Inflation: Structural inflation is that type of inflation often experienced in
developing countries which is caused by structural rigidities such as agricultural bottlenecks,
resource constraints bottlenecks, foreign exchange bottlenecks, physical infrastructural
bottlenecks etc.

C. On the basis of Coverage: Inflation has been categorized into following types on the basis of
its coverage:
1. Comprehensive Inflation: When the prices of all commodities rise throughout the
economy it is known as Comprehensive Inflation also known Economy Wide Inflation.
2. Sporadic Inflation: When prices of only few commodities in few regions rise, it is
known as Sporadic Inflation. It is sectional in nature. For example, rise in food prices due to bad
monsoon represents this type of inflation.

D. On the basis of Occurrence: Inflation has been categorized into following types on the basis
of its time of occurrence:
1. War-Time Inflation: when inflation that takes place during the period of a war-like
situation then it is known as War-Time inflation. During a war, scare productive resources are all
diverted and prioritized to produce military goods and equipments resulting in extreme shortage
of resources use producing essential commodities. Consequently, prices of essential goods keep
on rising in the market resulting in War-Time Inflation.
2. Post-War Inflation: Inflation that takes place soon after a war is known as Post-War
Inflation. After the war, government controls are relaxed, resulting in a faster hike in prices than
what experienced during the war.
3. Peace-Time Inflation: When prices rise during a normal period of peace then it is
known as Peace-Time Inflation. It is due to huge government expenditure or spending on capital
projects of a long gestation period.

E. On the basis of Government Reaction: Inflation has been categorized into following types
on the basis of Government's degree of reaction:
1. Open Inflation: When government does not attempt to restrict inflation, it is known as
Open Inflation. In a free market economy, where prices are allowed to take its own course, open
inflation occurs.
2. Suppressed Inflation: When government prevents price rise through price controls,
rationing, etc., it is known as Suppressed Inflation. It is also referred as Repressed Inflation.
However, when government controls are removed, Suppressed inflation becomes Open Inflation.
Suppressed Inflation leads to corruption, black marketing, artificial scarcity, etc.

EXAMPLE
3. For example, if your income stays the same and prices increase, then your
purchasing power is reduced. Therefore, you are left with two difficult options:
purchase the same number of goods at higher prices or purchase fewer goods
because of higher prices
MONETARY POLICIES

WHAT IS MONETARY POLICY?

Monetary policy is a set of tools used by a nation's central bank to control the overall money
supply and promote economic growth and employ strategies such as revising interest rates
and changing bank reserve requirements.

In the United States, the Federal Reserve Bank implements monetary policy through a dual
mandate to achieve maximum employment while keeping inflation in check.

MONETARY POLICY

Monetary policy is the control of the quantity of money available in an economy and the
channels by which new money is supplied.

Economic statistics such as gross domestic product (GDP), the rate of inflation, and industry
and sector-specific growth rates influence monetary policy strategy.

A central bank may revise the interest rates it charges to loan money to the nation's banks.
As rates rise or fall, financial institutions adjust rates for their customers such as businesses
or home buyers.

Additionally, it may buy or sell government bonds, target foreign exchange rates, and revise
the amount of cash that the banks are required to maintain as reserves.

TYPES OF MONETARY POLICY

Monetary policies are seen as either expansionary or contractionary depending on the level
of growth or stagnation within the economy.

Contractionary

A contractionary policy increases interest rates and limits the outstanding money supply to
slow growth and decrease inflation, where the prices of goods and services in an economy
rise and reduce the purchasing power of money.

Expansionary

During times of slowdown or a recession, an expansionary policy grows economic activity.

By lowering interest rates, saving becomes less attractive, and consumer spending and
borrowing increase.
GOALS OF MONETARY POLICY

Inflation

Contractionary monetary policy is used to temper inflation and reduce the level of money
circulating in the economy. Expansionary monetary policy fosters inflationary pressure and
increases the amount of money in circulation.

Unemployment

An expansionary monetary policy decreases unemployment as a higher money supply and

attractive interest rates stimulate business activities and expansion of the job market.

Exchange Rates

The exchange rates between domestic and foreign currencies can be affected by monetary
policy. With an increase in the money supply, the domestic currency becomes cheaper than
its foreign exchange.

TOOLS OF MONETARY POLICY

Open Market Operations

In open market operations (OMO), the Federal Reserve Bank buys bonds from investors or
sells additional bonds to investors to change the number of outstanding government
securities and money available to the economy as a whole.

The objective of OMOs is to adjust the level of reserve balances to manipulate the short-
term interest rates and that affect other interest rates.

Interest Rates

The central bank may change the interest rates or the required collateral that it demands. In
the U.S., this rate is known as the discount rate. Banks will loan more or less freely
depending on this interest rate.

The Federal Reserve commonly uses three strategies for monetary policy including reserve
requirements, the discount rate, and open market operations.

Reserve Requirements

Authorities can manipulate the reserve requirements, the funds that banks must retain as a
proportion of the deposits made by their customers to ensure that they can meet
their liabilities.

Lowering this reserve requirement releases more capital for the banks to offer loans or buy
other assets. Increasing the requirement curtails bank lending and slows growth.
THE BOTTOM LINE

Monetary policy employs tools used by central bankers to keep a nation's economy stable
while limiting inflation and unemployment. Expansionary monetary policy stimulates a
receding economy and contractionary monetary policy slows down an inflationary economy.
A nation's monetary policy is often coordinated with its fiscal policy.

EXAMPLE
for example, buys or borrows Treasury bills from commercial banks, the central bank will
add cash to the accounts, called reserves, that banks are required keep with it. That expands
the money supply.
FISCAL POLICY
Fiscal policy is defined as the policy under which the government uses the instrument of
taxation, public spending and public borrowing to achieve various objectives of economic
policy. Simply put, it is the policy of government spending and taxation to achieve
sustainable growth. Fiscal policy is often contrasted with monetary policy which is regulated
by the central bank. It is largely inspired by the ideas of British economist John Maynard
Keynes whose theories were developed in the response to the Great Depression and were
hugely influential in the formulation of the New Deal in the U.S. that aimed at huge spending
for public projects and social welfare development.

HOW DOES IT WORK?

When policymakers want to influence the economy, they mainly have two tools at their
disposal, Monetary policy and Fiscal policy. The monetary policy is regulated by the central
banks. Money supply in the market is adjusted by tweaking the interest rates, bank reserve
rates, sale and purchase of government securities and foreign exchange.

On the other hand, fiscal policy is influenced by the governments by adjusting the nature and
extent of the taxes, government spending and borrowing. A healthy fiscal policy is important
to control inflation, increase employment and maintain the value of money. It has a very
important role in managing the economy.

The government has two variables to influence fiscal policy, namely

Taxation- regulating which the government increases or decreases the disposable cash in the
hands of the public.
Government spending- using which the government invests in public infrastructural works
and other social welfare schemes that directly or indirectly influence the state of the
economy.

To incentivize spending, the government may announce tax cuts and when the economy faces
high inflation, the government may announce new taxes or raise the levels of existing taxes.
During a period of negative growth, the public and investors may lose faith in the economy
which in turn may result in lower production and lower demand. To counter that the
government may increase spending to tide over the falling private sector investment and to
create demand in the market.
This phenomenon was best witnessed during the Second World War when governments
invested hugely to build their armed forces. A huge increase in government spending resulted
in a massive growth in employment and increased demand in the commodity market. The
Second World War is often credited with bringing Europe out of the Great Depression.

OBJECTIVES OF A FISCAL POLICY

The objectives of a fiscal policy may vary- from spending on public asset creation like roads,
railways and other infrastructural works to public health and safety to promoting education,
payment of salaries, subsidies, pensions etc. It also aims to incentivise private sectors to scale
up their operations that directly or indirectly influence the economy of a country. The tools of
fiscal policy also aim to stabilise the economy during various inflationary pressures. In the
short term, the governments may focus on macroeconomic stabilisation by cutting taxes and
increasing spending to boost a weak economy or increase taxes and reduce spending during
inflation. In the long term, it may focus on sustainable growth and the reduction of poverty.
It also aims at promoting income equality by levying direct taxes on higher-income
individuals while subsidising the consumption items of low-income households. Necessary
items like fuels, food items etc are subsidised for the masses while luxury items like imported
cars, vanity products etc are indirectly taxed to maintain parity among citizens. This is one of
the ways by which the government maintains a balance of receipts and payments.

WHY IS IT NECESSARY?
In the present day scenario, a free market without government control is like a moving car
without a driver. It will be fine as long as the conditions are favourable but introducing
corrections becomes very difficult once the going gets tough. The recent shocks of the Covid
pandemic showed that a prudent fiscal policy is necessary for implementing corrections and
sustaining the population while steering the economy at a volatile time. Every government of
every country followed some kind of fiscal policy; some incentivised spending while some
focused on the supply side of the economics. One of the major differences between an
economy that rose above the shocks of the pandemic and the one that got overburdened was
an effective fiscal policy.

As in the case of India, a country of 1.3 billion, the pressure to jumpstart the economy was
huge. As a policy decision, the government provided a food security net, the largest of its
kind in the world, to the vulnerable population. It announced various other rate cuts and
monetary support to businesses and MSMEs while focusing on removing the bottlenecks on
the supply side of the economy. It invested in huge infrastructural spending and also focused
on public health by way of administering free vaccines. As a result, in 2022, IMF predicts
India to be the fastest-growing major economy in the world despite geopolitical uncertainties,
supply-side disruptions and rising commodity prices.

THE DOWNSIDE
Although the fiscal policy is an effective tool to manage the economy, sometimes factors
other than economic requirements take centre stage. Politics of popularism in the form of
grants, subsidies and other financial stimuli that are hard to roll back creates unnecessary
pressure on the economy. The government is forced to fund the deficit by diverting funds
from other areas. Many a time, it is seen that the targeted beneficiaries of a policy decision
like tax cuts are the middle class which happens to be the largest segment of people in a
country. But when inflationary pressures mount, the rising tax becomes a burden for the same
segment and they end up paying proportionately more tax than the rich class. Raising tax is
an unpopular choice when considered from a political angle. To mitigate that government
often resorts to curtailing government spending while keeping the tax rates unchanged.

The biggest dilemma among the policymakers is to figure out how much control should the
government have in the economic matters of the country as well as individuals. Too much or
too less will constrict the breathing space of the economy. Practical and populist measures
often clash and choosing one over the other or finding a middle way becomes difficult. Thus
implementing optimum checks and finding the right balance is the secret to a prudent fiscal
policy.

EXAMPLE
Necessary items like fuels, food items etc are subsidised for the masses while luxury items
like imported cars, vanity products etc are indirectly taxed to maintain parity among citizens.