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Unit 4: Capital Formation

legal and labour-market supplies. The third section look at the part of the financial sector and Notes
the institutions that are necessary to promise the satisfactory provision of financial services for
investment, access by the poor and small enterprises to such services, and the sensible guideline
and direction required to promise the steadiness of the financial system. Savings, investment
and growth a long-standing opinion of the macroeconomic dynamics of the growth procedure
was that a poor country had to increase its savings rate (that is to say, to change from a “12
per cent saver” to a “20 per cent saver”) and alter the augmented savings into prolific investment
in order to realize an economic “take-off”.
Emphasis was generally located on growing investment in industrial sectors, but public
investment in such physical arrangement as power, transportation systems and health and
education services was also seen as critical. Consequently, technical growth was hosted as an
element of long-term growth, with some specialists disagreeing that its part was dominant, or
even high-class. With the initiation of so-called endogenous progress models, yet, investment
was again accepted as a serious factor for long-term growth. General, philosophies of financial
development have been advanced, adapted and extended over the years and now include an
extensive variety of factors, reaching from the decently financial to social and national
deliberations.

However, most clarifications comprise, to variable degrees and in numerous arrangements,
three fundamental economic factors, specifically, investment, innovation and improvements in
productivity, with the three existing interconnected in a variety of ways. The relations amongst
savings, investment and growth have been established to be more complex than originally
imaginary, but it remains usually acknowledged that increasing savings and safeguarding that
they are directed to productive investment are vital to hastening economic growth. These
objectives should consequently be vital concerns of national policymakers. A state Plan will,
therefore, have to classify these changes, and confirm that the state-wise marks set in the state
Plan

Example: Although the economy as a whole has accelerated, the growth rates of different
states have diverged and some of the poorest states have actually seen a deceleration in growth.

Self Assessment

Fill in the blanks:
5. Theories of economic growth have been …………………… over the years and now
encompass a wide range of factors, ranging from the purely economic to social and cultural
considerations.

6. The relationships among savings, investment and growth have been found to be more
…………………… than initially imagined, but it remains generally accepted that increasing
savings and ensuring that they are directed to productive investment are central to
accelerating economic growth.

!

Caution There are important qualifications to the projections of eleventh plan which
must be kept in mind, arising from the limitation of employment elasticity as a projection
tool. The concept of employment elasticity is at best a mechanical device to project
employment on the basis of projected growth of output and past relationships between
employment and output. These relationships can change as a result of changing technology
and change in real wages. The labour force participation rate is also subject to changes
especially because of possible changes in female participation rates in urban areas associated

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