Q. Which of the following measures will spur the economic growth?
1. Transparent and hassle-free land acquiring.

2. Availability of Skilled labor.

3. High interest rates in the economy.

4. Decrease in effective demand.

Select the correct answer using the code given below:

[A] 1 and 2 only

[B] 2, 3 and 4 only

[C] 1, 3 and 4 only

[D] 1, 2, 3 and 4

Answer: A

The traditional argument is that the lower the interest rate, the better for businesses as it brings down the cost of capital, making investments more attractive.

  • Any government would love this as the country would then draw higher investments leading to higher growth and more job creation.
  • Governments abhor higher interest rates as, theoretically, these push up project costs and keep investors away.
  • Capital is one of the three main factors of production, which are critical to the growth of a commercial entity, the other two being land and labour.
  • But capital is only a necessary, not sufficient, condition. Land, unless allocated by the local government, is too costly for investors seeking to set up shop.
  • On labour, even if adequate hands are available for a job, the skill quotient is still low. Training graduates to be job-ready is a form of tax that companies pay.
  • Also, to be taken into account is the market environment and demand. If end users are seeing lesser money in hand than earlier, demand will certainly be impacted.
  • Therefore, in an environment where the other factors of production are not favourable for an investor, low interest rates by themselves may not prove attractive enough.
  • Any revival of economic activity will be contingent on joint efforts by the government on the fiscal front to stimulate demand, and the RBI, to keep interest rates low.

Source: Sriram’s IAS