(Sample Material) UPSC IAS Mains GS Online Coaching : Paper 3 - "Mobilization of resources, growth, development and employment"

Sample Material of Our IAS Mains GS Online Coaching Programme

Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Mobilization of resources, growth, development and employment

Mobilization of resources, growth, development and employment

MOBILIZATION OF RESOURCES

Mobilization of resources means the freeing up of locked resources. Every country has economic resources within its territory known as domestic resources. But often they might not be available for collective use. The percentage of resources used when compared to the potential is often very low. For a country to grow, identification and mobilization of its resources is necessary. It should be available for easy use and for central and state level planning.

The saving and investment process in an economy is organised around a financial framework that facilitates economic growth. A well designed financial system promotes growth through effective mobilisation of savings and their allocation to the most productive uses by either following a centralised approach or a decentralised approach or a combination of both. Typically, economies with underdeveloped capital markets adopt a centralised approach, whereby financial intermediaries mobilise resources from savers and allocate them to borrowers. Traditionally, banks have played a critical role in the financial intermediation process as they are able to deal more appropriately with transaction costs and information asymmetries in a financial system. As financial markets develop, transaction costs and information asymmetries reduce, the decentralised approach for guiding the saving-investment process also gains significance, and households with surplus resources increasingly invest in capital market instruments. The historical experience shows that virtually in all the economies, including the market-intermediated ones, banks have played a central role in resource mobilisation and supporting the growth process, and that the development of banks and other intermediaries has itself facilitated the development of financial markets.

The genesis of banks’ role in the resource mobilisation process lies in firms relying critically on external sources of finance, especially in their formative stages. In particular, banks have played a key role in coordinating investment efforts in many economies such as Belgium, Germany, Italy and Japan in engineering ‘take-offs’ during their critical phases of development. Resource mobilisation by banks became a critical factor in their ability to act as ‘catalysts’ of economic development. During the ‘take-off stages’ of these economies, large and powerful banks initially relied on capital contributions from a small number of founders and thereafter as their industrial lending portfolio grew, they took recourse to deposits as a major source of funds. With the development of markets, borrowings also became an important source of funds for the banks.

Historically, financial intermediation by banks has played a central role in India in supporting the growth process by mobilising savings, particularly after the nationalisation of the 14 major private banks in the late 1960s. Banks have been particularly instrumental in mobilising deposits from the household sector, the major surplus sector of the economy, which, in turn, has helped raise the financial savings of the household sector and hence the overall saving rate. Notwithstanding the liberalisation of the financial sector and increased competition from various other saving instruments, banks continue to play a dominant role in the financial intermediation of the Indian economy. The deregulation of interest rates has opened up new avenues for banks to mobilise funds at competitive rates. Moreover, banks, by virtue of being the ultimate platform for clearing and settlement for all financial transactions, provide accounts and resources to other sectors as also other financial intermediaries.

The Indian economy has witnessed robust growth performance in recent years and banks have played a major role in providing the required amount of resources. In order to sustain the growth process, banks would have to continue to provide funding on a large scale. In India, there exists an enormous potential of savings in rural and semi-urban areas. Also, in India quite a large part of domestic savings is locked up in unproductive physical assets. The mobilisation of savings from hitherto untapped areas and conversion of physical savings into financial savings would necessitate introduction of appropriate products to suit the demand of savers. Banks are indeed in an ideal position to do so because of certain inherent characteristics of deposits such as safety and liquidity.

Apart from mobilisation of deposits, banks, for meeting their resource needs, also depend on non-deposit resources both at home and abroad. A part of non-deposit resources comes from borrowings, which help augment the funding needs of the banks instantly. However, they also pose a challenge in terms of their availability and management of borrowing costs, amidst potential interest rate and exchange rate risks. Thus, an effective use of borrowings requires a system of appropriate risk management by banks.

ECONOMIC GROWTH

A term coming from the life sciences, ‘growth’ in economics means economic growth. An increase in the economic variables over a period of time is — economic growth. The term can be used in an individual case or in the case of an economy or for the whole world. The most important aspect of growth is its quantifiability i.e. one can measure it in absolute terms. All the units of measurement may be applied to show it, depending upon the economic variable where the growth is being studied. We have a few examples:

(i) An economy might have been able to see growth in its food production during a decade which could be measured in tonnes
(ii) Road network growth of an economy might be measured for a decade or any period in miles or kilometres.
(iii) Similarly, the value of the total production of an economy might be measured in currency terms which means the economy is growing.
(iv) Per capita income for an economy might be measured in monetary terms over a period. We may say that economic growth is a quantitative progress.

To calculate the growth rate of an economic variable the difference between the concerned period is converted into percentage form. For example, if a dairy farm owner produced 100 litres of milk last month and 105 litres in the following month, his dairy has a growth rate of 5 per cent. Similarly, we may calculate the growth rate of an economy for any given successive periods. Growth rate is an annual concept which may be used otherwise with the clear reference to the period for which it is used. Though growth is a value neutral term i.e. it might be positive or negative for an economy for a period, we generally use it in the positive sense. If economists say an economy is growing it means the economy is having a positive growth otherwise they use the term ‘negative growth. Economic growth is a widely used term in economics which is useful in not only national level economic analyses and policy making but also highly useful in the study of comparative economics. International level financial and commercial institutions go for policy making and future financial planning on the basis of the growth rate data available for the economies of the world.

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