Prime Minister’s Economic Advisory Council Chairman C. Rangarajan, while addressing the Delhi Economics conclave satellite session on ‘Accelerating growth,’ called upon States to work “in the direction of increasing the saving and investment rate to enable them to catch up in growth….” Speaking at the meeting, Raghuram G. Rajan, Chief Economic Advisor to the Finance Ministry, echoed the views of Dr. Rangarajan and said that the disparities arose mainly on account of the sectoral imbalances. While the services sector in India witnessed runaway growth, manufacturing growth flattened and agricultural growth declined. He stressed the need for increasing the tempo of manufacturing growth.
THE BACKGROUND
In order to understand a clear meaning of the statements of the two financial experts who are currently advising the Government of India on financial matters some discussion in easy-to-understand language may be needed. In order to achieve growth in any economy a government should ensure that manufacturing sector too grows at a faster rate along with the growth of service sector and agriculture sector. Any sectoral imbalance will impede the growth. Such overall growth requires investment of funds. A major source of such funding is saving. In other words, the growth path encompasses saving which is invested for production (of goods and services). These are simple theories of economics which one can understand. The above mentioned suggestions were presented in a seminar intended to study the growth trajectory of one state. Here the Central government advisers are suggesting what the particular state government should do to come up economically and compete with other states.
THE OVERVIEW
What is true for one state is true for the Central government too. And what is true for the nation as a whole is true for its citizens too. The savings of a government, state or central, is the summation of the amount set apart by persons living therein. Such persons comprise individuals, families, corporations and non-corporate entities. The starting point in this formula for growth is saving. If a person consumes all present income, he would not be having own capital for investment. Then the other way out will be the shared capital or borrowings. The capital provided by other persons itself may originate either from savings or borrowings. However, borrowings in this world have a cost. Such cost of borrowed fund ultimately tells upon the growth.
Saving implies leaving aside a portion of present income. If every penny earned is consumed then there will be no resource for investment. The fallacy of the present world is that instead of saving a portion of present income for investment, people and nations borrow on the strength of future income. That borrowed fund hits an economy from two sides; erodes present saving and takes us in the hall of future as an indebted person. All scopes of growth both in the present and the future are hampered if not obstructed for good.
One hopes the advisors of the Central government will guide the economy of the nation in accordance with these basic facts.
[waquaranwar@yahoo.com]