GS3 PYQ 2017 (Mains Answer Writing): Savings and Investment - Notes | Study Indian Economy for UPSC CSE - UPSC

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 MAINS GS3 2017)

Capital formation is the most important factor that drives the economic development of a nation. It is mainly the transfer of savings from households to the business sector that leads to increased output and economic expansion.
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.
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.
• 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.

Topic Covered - Savings and Capital Formation