On Economic Growth

‘Economic Growth’ is a term which one often sees in the media. It is also looked at closely by the economists, the government and the people. Economic growth tends to show the rate of growth of an Economy

The chart graphs the growth rate of the Indian Economy.

What is this ‘Economic Growth”

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. [Wikipedia]

Economic growth has become the Holy Grail of the 20th century. [Lewis 1974] The ‘saga’ continues. Governments like projecting a target rate of growth (The higher the better) for the economy and the economists like to fiddle around with the projected targets.

Why ‘growth’ happens’

One factor which caused growth is said to be the increments in capital. This ‘link’ was given to us by Roy Harrod in the 1940’s. This causality led to the policy of increased expenditure on capital mainly by the government, so as to ‘grow in GDP’.

In the 1950s, Robert Solow (1956) of MIT generalised the relationship between capital, labour, technology and output in the neat little ‘neoclassical production function’, which still lies at the heart of contemporary growth accounting exercises. Other theorists (as well as planners and policy-makers) also emphasised the importance of education (human capital) and technological development in spurring sustained growth. [Acharya 2006]

Economic growth was caused by capital accumulation, or a rise in the ratio of investment to income and/or increasing efficiency and productivity. [Roy 2006]

Thus, basically with growth in labour, capital (Physical and Human) and technology, there will be growth in the economy too.

According to Paul Romer, three broad factors contribute to growth in output per capita:

1) Increases in physical capital ‘ the buildings, machinery, and infrastructure that we use in daily life.

2) Increases in human capital ‘ the skills and experience of the workforce.

3) Increases in productivity ‘ a catchall category that includes the many large and small discoveries that lead to the introduction of new goods and services or to more efficient production of existing goods and services.

The significance of economic growth

History shows us that a small permanent increase in the trend rate of growth can profoundly alter our quality of life. [Romer 2001]

Keeping this in mind, economic growth acts as an important indicator. So Governments try to achieve high rates of growth so as to provide their respective nations with a high quality of life. But, quality of life is better measured using the HDI rather than GDP.

There is, indeed, a positive relationship between rapid economic growth and a victory over poverty. But this does not happened automatically. A good economics that concentrates on the even distribution of economic opportunities and benefits is essential. And further, good economics has to be also combined with sensible and responsible politics. [Alexander 2005]

Early works on Economic Growth

Robert M. Solow, the Nobel Prize winner in 1987 says in his Prize lecture ‘Growth theory did not begin with my articles of 1956 and 1957, and it certainly did not end there. Maybe it began with The Wealth of Nations; and probably even Adam Smith had predecessors.’

Some of the economists who worked on growth models prior to Solow were Roy Harrod, Evsey Domar and W. Arthur Lewis.


It is the GDP rate which appears to be more of a concern than the HDI, which does not enjoy the limelight as GDP does. Both these criteria are important and thus the need for understanding both of them.


1) Shankar Acharya, Economic Growth: Some Reflections, November 4 2006, EPW.

2) Tirthankar Roy, The Economic History of India 1857-1947, Second Edition, Oxford Textbooks.

3) Paul M. Romer, Growth Policy, 2001 SIEPR Policy Brief.

4) John M. Alexander, Economic growth and the Millennium Goals, 2005, The Hindu.

5) [Indian Growth trend picture]

Further Readings

1) Selected Articles on Economic Growth by Paul Romer.


1) Journal of Economic Growth

2) Institute of Economic Growth, India.

3) Economic Growth Resources

HDR 2006 and India

The Human Development Report for the year 2006 has been released. This year’s HDI refers to 2004.India has moved one step up to be ranked 126 among a total of 177 countries. [Last year India was ranked 127] India’s HDI rank falls under the category of ‘medium human development countries’.

The HDI provides a composite measure of three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary and tertiary level) and having a decent standard of living (measured by purchasing power parity, PPP, income). The index is not in any sense a comprehensive measure of human development. It does not, for example, include important indicators such as inequality and difficult to measure indicators like respect for human rights and political freedoms. What it does provide is a broadened prism for viewing human progress and the complex relationship between income and well-being. Read more on HDI here.

HDI Rankings

Norway is ranked first in this year’s HDR report, while the USA is ranked 8th, Japan 7th, China 81st and Pakistan 134th. And Niger is ranked last at 177.

India: Human Development [A few indicators]

1) HDI Rank: 126

2) The population below income poverty line of 2$ per day is 79.9%, though as per the national poverty line it is 28.6%.

3) The HPI (Human Poverty Index) for the 102 developing countries rank India at 55.

4) The Annual Population growth rate is pegged at a rate of 1.3%. [2004-15]

5) The Public health expenditure of India as a percentage of GDP is 1.2%, while that of the private is 3.6%. [2003]

6) The percentage of total population who are undernourished is 20%. [2001/03]

7) Life expectancy at birth: 63.1 [2000-05]

8] Infant mortality rate per 1000 live births: 62 [2004]

9) The public expenditure on Education as a per cent of GDP is 3.3% [2002-04] which has fallen from 3.7% in 1991.

An irony

‘Only 25% of the poorest households in developing countries have access to piped water in their homes as compared to 85% of the richest households.’ Says HDR 2006.

The same report states that only 14% of people in India lack access to an improved water source. This implies that 86% of people in India have access to improved water, thereby rendering India almost in par with developed countries in terms of access to an improved water source. This figure has been definitely deflated. One of the major reasons for this deflated figure is due to lack of adequate and complete statistics.


The HDI alone or the GDP alone cannot give the real picture of any economy. Both the HDI and the GDP do not take into account the inequalities. India is a country which is characterised by stark inequalities in wealth, income, education, health, land etc. India is the land of the billionaires as well as people who go hungry everyday and the land where little children are forced to work.

The authorities’ rhetoric of trickle down effects of an 8% GDP will not work, due to lack of proper institutions to cater to the needs of the poor. Microfinance, an institution which is working needs to be implemented more effectively and in a transparent manner, because the misuse of Microfinance institutions can lead to more trouble than not having them at all.

The main focus of this year’s HDR is on the Water Crisis which is plaguing countries both developed and developing alike. Adverse effects of pollution, increased green house gases can be witnessed in unanticipated floods and droughts plaguing many countries. And in the last few years, we had to face the Tsunami which wreaked havoc. According to Developments, “97% of all the deaths from natural disasters are in poor countries”.

The Indian populace has been repeatedly told that India is reducing its poverty and that it is well under 30%. They are right. [According to the official poverty line of a dollar per day] But keeping in mind the needs of the people for a decent livelihood, a family needs at least an income of 2000 rupees per month!

On the whole, there is nothing in the report that makes India proud. India needs to step up its expenditure specifically targeting education and health sectors. The draft to the 11th 5 year plan, speaks about inclusive growth, but adequate emphasis has not been given to sectors which need development.


1) Human Development Report 2006

What is the HDI’

The human development index (HDI) is a composite index that measures the average achievements in a country in three basic dimensions of human development: a long and healthy life, as measured by life expectancy at birth; knowledge, as measured by the adult literacy rate and the combined gross enrolment ratio for primary, secondary and tertiary schools; and a decent standard of living, as measured by GDP per capita in purchasing power parity (PPP) US dollars.

HDI serves the following purposes.
‘ To capture the attention of policy makers, media and NGOs and to draw their attention away from the more usual economic statistics to focus instead on human outcomes. The HDI was created to re-emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth.
‘ To question national policy choices – asking how two countries with the same level of income per person can end up with such different human development outcomes (HDI levels). For example, Viet Nam and Pakistan have similar levels of income per person, but life expectancy and literacy differ greatly between the two countries, with Viet Nam having a much higher HDI value than Pakistan. These striking contrasts immediately stimulate debate on government policies on health and education, asking why what is achieved in one country is far from the reach of another.
‘ To highlight wide differences within countries, between provinces or states, across gender, ethnicity, and other socioeconomic groupings. Highlighting internal disparities along these lines has raised national debate in many countries.

The HDI does not reflect political participation or gender inequalities. The HDI and the other composite indices can only offer a broad proxy on some of the key the issues of human development, gender disparity, and human poverty.

HD Report 2005
The US has been given the 10th rank, China 85th and India 127th rank. China and India falls in the category of medium human development while US in high human development.

Conclusion & suggestions
We have a long way to go in the path of human development. With more than 50% of population poor, we really have a long path. The government needs to put in more funds for developing backward areas and it has to seek the help of the private sector in this development process. Only a development process with public private partnership will be successful. India needs to reform its education sector mainly requires more qualified teachers who have to be given adequate remuneration. The current wages for teachers need to be revised. Education is an important tool for enhancing growth in a country and also the most efficient way.
For sustenance we need proper health care centres and good hospitals and medical colleges. We need to have efficient and innovative pharmaceutical companies who should be willing to reduce the exorbitant rates of medicines.
To enable connectivity, proper transport must be readily and cheaply available. Roads must be well laid and rural connectivity must be specifically implemented with haste.
The central, state and the local self governments need to work together to achieve high rates of human development and growth!

HDR 2005